North Chicago-based AbbVie Inc. is on the verge of abandoning its $51 billion takeover of Shire Plc after recent talks with the U.S. Treasury Department and Internal Revenue Service left it convinced that tax-rule changes would undermine the deal's rationale, people familiar with the matter said.
AbbVie is also concerned about the potential for more changes to U.S. laws, whether through executive-branch action or legislation in Congress, that will increase future tax bills, the people said, asking not to be identified discussing a private matter.
The price AbbVie agreed to pay for Shire was the highest that it was able to offer, and the loss of some tax benefits and the related prospect of having to borrow more for the merger have eroded its attractiveness, the people said.
The drugmaker's board -- which said it is reconsidering its endorsement of the purchase - - is almost certain to rescind that backing when it meets on Oct. 20, the people said.
The merger would be the largest casualty yet of rules announced last month by the Treasury Department to make tax inversion deals more difficult. In such transactions, U.S. companies seek to lower their tax bill moving their legal address abroad, often after buying a foreign company. President Barack Obama's administration has said the rules are necessary to prevent the erosion of the U.S. corporate tax base.
Shire's American depositary receipts dropped 30 percent to $170.49 in New York trading yesterday. AbbVie rose less than one percent to $54.63.
AbbVie identified concerns that fell into two broad categories, the people said: those that would affect the structure and financing of the merger with Shire as it was originally conceived, and those that might affect the future of the combined company.
For example, last month's changes would probably have limited AbbVie's ability to pay for Shire using its existing offshore cash reserves, raising the cost of financing a purchase, the people said. Additionally, although no such rules have been announced, future changes could further impact the ability of the merged company to shelter earnings from U.S. corporate taxes, one of the people said.
The new rules have had some effect on other deals already. Medtronic Inc. said it will borrow $16 billion to finance its purchase of Covidien Plc instead of using cash it keeps overseas, and Salix Pharmaceuticals Ltd. and Auxilium Pharmaceuticals Inc. canceled planned inversions.
Treasury is contemplating a second set of rules that would limit companies from engaging in earnings stripping, a practice used by non-U.S.-based companies to load up U.S. operations with debt and effectively shift profits to countries with lower tax rates.
Congress, which could impose even more stringent rules, is deadlocked on the issue and isn't scheduled to return to Washington until after the Nov. 4 election.
AbbVie began a comprehensive review of the merger after Treasury Secretary Jack Lew announced the measures, people with knowledge of the matter said last month, including the prospect of borrowing as much as $7 billion more than it initially anticipated.
The rules, which apply to deals that close starting Sept. 22, include a prohibition on "hopscotch" loans that let companies access foreign cash without paying U.S. taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favorable tax treatment.
Shortly after the rules were announced, people familiar with the matter said AbbVie was still committed to completing the merger. Were a takeover to be completed, it would give the company Shire's drugs for attention-deficit disorder and rare diseases.
Shire's board yesterday said AbbVie should proceed with the recommended offer on the agreed terms, and that it would be owed a $1.6 billion breakup fee if AbbVie halts the deal.
Jennifer Smoter, a spokeswoman for AbbVie, declined to comment, as did Shire spokeswoman Stephanie Fagan and Treasury spokeswoman Erin Donar, who said the agency doesn't comment on specific deals. IRS spokesman Mark Hanson also declined to comment, citing federal law prohibiting the IRS from discussing individual taxpayer information.