AbbVie faces $1.64bn ‘break-up’ fee for ditching Shire takeover plan over changes to US tax rules

US drugmaker AbbVie has pulled the plug on its plan to buy Dublin-based Shire, recommending shareholders vote against the planned $55bn (€42.96bn) takeover after new US tax rules.

Shire stands to be paid a break-up fee of about $1.64bn if AbbVie’s shareholders follow the advice and reject the transaction.

The reversal, which had been anticipated after Chicago-based AbbVie said it was reconsidering the deal, hands a major scalp to the US Treasury, which has been fighting to make tax-avoiding acquisitions more difficult.

It could also open up fresh deal-making permutations, since Shire itself has a strong track record of making acquisitions to fuel its fast-growing business and may now look to buy other companies, with its firepower boosted by the break-up fee.

The US government’s tax proposals are designed to make it harder for American firms to shift their tax bases out of the country and into lower-cost jurisdictions in Europe.

“The agreed-upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed,” AbbVie’s chief executive Richard Gonzalez said in a statement.

AbbVie’s move for Shire, a leader in drugs to treat attention deficit disorder and rare diseases, was announced in July amid a spate of deals in the pharmaceutical sector.

Gonzalez said at the time that the acquisition, involving the creation of a new US-listed holding company with a tax domicile in Britain, was not just about tax.

But the firm said yesterday that the changes in the US tax regime “eliminated certain of the financial benefits of the transaction, most notably the ability to access current and future global cash flows in a tax-efficient manner as originally contemplated in the transaction.

“This fundamentally changed the implied value of Shire to AbbVie in a significant manner.”

Shire said it was considering the current situation and would make a further announcement in due course.

News on Wednesday that AbbVie was cooling to the transaction hammered shares in Shire, sending them down 22%, to where they were before the deal talks emerged in June, and the shares were down a further 7% at 3,732 pence by 8.30am.

AbbVie’s charge of heart has been a bombshell for some of the world’s top hedge funds, which have lost out heavily on the Shire stock they were holding.

AbbVie said the withdrawal of its recommendation alone would not cause a lapse in the offer for Shire and it must convene a shareholder meeting before December 14 to vote on the deal.

A spate of so-called tax inversion merger deals, particularly in the healthcare sector, prompted the US move to change its tax regulations, including placing a ban on loans that allow US companies to access foreign cash without paying tax in the United States.

AbbVie said the breadth and scope of the changes “introduced an unacceptable level of uncertainty to the transaction”.

The company also took a swipe at the “unilateral” nature of the US government’s move and complained about “the unexpected nature of the exercise of administrative authority to impact longstanding tax principles”.

AbbVie’s second thoughts on the deal have surprised Shire investors, coming just weeks after Gonzalez, in the wake of the Treasury proposals, told employees of both companies he was “more energised than ever” about the transaction.

Aside from the tax benefits, buying Shire offered AbbVie a way to diversify its business and reduce reliance on arthritis treatment Humira, the world’s top-selling medicine, whose $13bn in annual sales accounts for more than 60% of company revenue. The Shire episode has also fuelled doubts about whether Pfizer, which abandoned a $118bn bid for AstraZeneca in May after its offer was rejected, will ever make another run at its British rival.

Tax experts say that inversions are still possible — but the US action has reduced their appeal, suggesting that they will only make sense when there is a compelling strategic fit between two companies.

Salix Pharmaceuticals also called off its $2.7bn merger deal with Italy’s Cosmo Pharmaceuticals this month because of the US crackdown.

Analysts are now looking ahead to Shire’s strategy as an independent company once again and its own potential for making acquisitions — or else becoming a target for another company.

Before the AbbVie agreement, Shire Chief Executive Flemming Ornskov had made it clear he was interested in buying assets, and Jefferies analysts said a standalone Shire could now be poised to aggressively target acquisitions.

Shire itself might also be a target for other pharmaceutical companies less driven by tax considerations.

Allergan, for example, which is fighting a bid from Valeant Pharmaceuticals International, has approached Shire in the past.