A major change in US tax laws could make the benefits of deals between European pharmaceutical companies and their American rivals less attractive after a massive deal was scrapped this week.
Many American companies have sought mergers with European rivals in order to redomicile and thus escape their punitive domestic corporate tax charge of 34 per cent. The US government has tried, unsuccessfully, to crack down on this before but this week announced a further step to curb the slew of tax inversion deals.
The new laws quickly claimed their first victim with the US-based Pfizer (US:PFE) calling off its $160bn (£114bn) deal with Irish-domicilled Allergan (US:AGN) just a day later. Shares in the latter dropped 15 per cent on the back of the announcement.
This 'anti-inversion' legislation sent alarm bells ringing for Shire (SHP) shareholders, pushing the stock down 4 per cent initially. The company is currently undergoing late-stage acquisition discussions with US-based Baxalta (US:BXLT) and today said that the latest tax laws in the US would not derail the deal.
Even though this is not a tax inversion deal as Shire is buying Baxalta, the acquisition would have nonetheless seen Baxalta's tax rate cut to between 16 and 17 per cent post-acquisition thanks to tax benefits that would have been claimed under the former US laws. But the new legislation means Baxalta is likely to have to pay the 20 per cent blended rate analysts had been expecting.
Although exact figures are yet to be confirmed, early predictions suggest the earnings accretion of the deal could fall from 6 per cent to 3 per cent, according to a fund manager who holds Shire but did not want to be named.
Shares in AstraZeneca (AZN) and GlaxoSmithKline (GSK) rose on Wednesday as the pair are both former targets of Pfizer. Some commentators now wonder whether Pfizer could once again turn its attention to a UK target, with some believing Astra would be an attractive prospect compared with many of its European rivals. However, the company rebuffed approaches by the US company in 2014 so a deal looks unlikely.
