AbbVie Inc. and Shire plc agreed to terminate what would have been the biggest U.S. tax inversion after AbbVie pulled its support for the deal in the wake of proposed changes to U.S. rules governing such transactions.
AbbVie, based in North Chicago, Illinois, planned to buy Shire for an estimated $52 billion, then move the combined company’s legal address to the U.K. to lower its tax bill and access cash trapped overseas. After confirming the deal was dead, the drugmaker announced a $5 billion share buyback over the next several years and increased its quarterly dividend by 17 percent, to 49 cents per share.
“We recognize that without a transaction the size of Shire, our cash position will build quickly, it has always been our commitment to return cash to shareholders,” Richard Gonzalez, AbbVie’s chief executive officer, said in a conference call following the announcements.
The deal is the largest casualty yet of rules announced last month by the U.S. Treasury Department to make tax inversion deals more difficult. The new rules “reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions,” AbbVie said in a statement.
AbbVie said it will pay Shire a breakup fee of $1.64 billion. Shire is based in Ireland for tax purposes, but has executive offices in Basingstoke, England.
Shire said it remains “well-positioned” to deliver on the company’s previously announced growth strategy of doubling annual product sales to $10 billion by 2020, and will focus on doing its own deals in areas where it has treatments as well as “adjacent therapeutic areas.”
Shire rose 0.4 percent to 3,763 pence as of 8:20 a.m. in London. The stock dropped 28 percent over two days last week after AbbVie said its board had decided to recommend shareholders vote against the deal.
“It’s unfortunate that it’s falling apart,” said Michael Leuchten, an analyst with Barclays plc in London. “But Shire’s in a pretty good position.”
Since the U.S. Treasury’s Sept. 22 notice about tightening tax rules, three of eight inversion deals have fallen apart. Auxilium Pharmaceuticals Inc. canceled its merger with QLT Inc., a Vancouver-based biotechnology company, which would have shifted its legal address to Canada. Auxilium instead agreed to be acquired by Endo International Plc, which is run from the U.S. though incorporated in Ireland.
Two new tax relocations have been announced since then, leaving seven pending inversions including Ohio-based Steris Corp.’s 1.2 billion pound ($1.9 billion) offer for Synergy Health Plc, which would allow the U.S. company to move to the U.K. for tax purposes. Civeo Corp., a Houston-based owner of worker housing, said it would relocate its tax address to Canada instead of becoming a real estate investment trust.
The takeover of Shire would have expanded AbbVie’s portfolio of medicines, particularly by gaining treatments for attention deficit hyperactivity disorder.
AbbVie’s “challenge now is in two years they lose their patent on one of the biggest blockbusters of all time, and they’ll have to replace that,” said Bill Smead, CEO of Smead Capital Management, in reference to the arthritis drug Humira. Smead owns AbbVie shares.