DEALTALK-Amid tax inversion craze, some U.S. companies get cold feet

Mon Aug 25, 2014 6:19pm EDT

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By Soyoung Kim

NEW YORK Aug 25 (Reuters) - The headline noise may suggest otherwise but U.S. companies' interest in tax-driven deal-making may be starting to cool down.

Bankers and lawyers providing takeover advice said on Monday that Burger King Worldwide Inc's intention to move its tax domicile overseas through a so-called inversion deal - in this case the purchase of Canada's Tim Hortons - shouldn't be seen as a sign of a lot more deals to come.

They say that U.S. companies looking to buy overseas rivals primarily for tax benefits are increasingly dismayed by rising prices, administrative hassles and fears of a U.S. government crackdown.

Inversion deals allow U.S. companies to move their domicile abroad to countries such as Ireland, Britain, the Netherlands, and in Burger King's case Canada, where corporate taxation laws are more favorable than at home. In particular, some multinational companies are reluctant to stay in the U.S. because profits earned overseas are taxed here. In some of the jurisdictions, companies pay no tax on these profits.

So far in 2014, nine corporate inversion transactions have been struck, the most in any given year. On Sunday, Burger King became the latest company seeking to move its domicile abroad through its proposed deal for Canadian coffee and doughnut chain Tim Hortons Inc. Canada's overall corporate taxes are lower than those in the United States.

Dealmakers now say the market for inversions is slowing down. For every tax inversion deal that gets announced, they said, there are many more that don't get done.

Political scrutiny on inversions is increasing in the run-up to the November Congressional election, with the Obama administration saying in recent weeks that it is looking for ways to make it harder and less rewarding for companies to do inversions.

Some companies have retreated due to opposition in Washington. For others, the targets have become too expensive.

"A few clients that were looking at inversions no longer are," said Joe Johnson, a partner at Goodwin Procter LLP based in Boston. "People are really looking more at the math and asking, 'Does it make sense? If you add it all up, is it really worth it?"

In recent weeks, U.S. retailer Walgreen Co ditched an attempt to reincorporate in Europe, while pharmaceutical giant Merck & Co Inc and biotechnology company Biogen-Idec Inc took public stances against doing deals primarily for inversion purposes.

Behind the scenes, dealmakers said, many more deals have fallen apart, and some chief executives are now opting to do straight cash acquisitions instead of a stock deal that would allow for a tax inversion.

"There is a higher bar to pursue an inversion right now," said Mark Boidman, a managing director at boutique investment bank Peter J. Solomon Company.

FOREIGN CASH

Dealmakers said inversions would likely slow but not completely stop, as multinational companies seek to put their foreign profits out of the reach of the Internal Revenue Service.

Pfizer Inc, which tried to invert by buying AstraZeneca Plc, for example, has about $27 billion of cash held offshore, or 80 percent of its total cash, according to 2013 public filings. Mylan Inc, which is relocating to the Netherlands by acquiring Abbott's European generic business for $5.3 billion, has 93 percent of its cash held outside the United States, the data shows.

In 2004, Congress enacted a "tax holiday" for U.S. multinational companies, allowing them to repatriate foreign profits at a 5.25 percent tax rate. A second tax holiday was defeated in the Senate in 2009 amid criticism that the Treasury Department lost billions of dollars due to the tax treatment.

Companies that are considering inversions are weighing whether the U.S. government will act on a comprehensive tax reform in the next few years, which would allow them to bring back home overseas cash without paying the current rate of 35 percent.

That is giving some of them pause.

"You go through all this. You're like an enemy of the state, and what if you only get two years of benefit? By the way, you don't integrate on day one, so why do all of this for nothing?" said a senior investment banker.

PRICEY TARGETS

Meanwhile, acquisitions are rising in price as potential targets based in tax-friendly jurisdictions are trading up in anticipation that someone will scoop them up.

Europe-based companies that are seen as takeover targets such as Jazz Pharmaceuticals Plc and AstraZeneca saw their shares rise 27 percent and 24 percent, respectively, so far this year, outpacing an 11 percent gain in the broader pharmaceuticals index.

As a result, tax inversions are expensive. Buyers, on average, paid below 13 times target companies' trailing earnings before interest, tax, depreciation and amortization (EBITDA) this year, according to Thomson Reuters data. In comparison, AbbVie paid 24 times EBITDA for Shire, while Medtronic paid 14.3 times for Covidien, according to Thomson Reuters data.

"These things have become so hyped that the prices have adjusted to that. In most cases, it just is not worth it," said a board member of a large healthcare company, who requested anonymity because he was not authorized to speak with the media.

Then there are other administrative headaches that become sharper as the economic benefits become less clear. At least two healthcare company directors said inversions could sometimes lead to loss of talent because they often require the majority of board meetings to be held in the new jurisdictions, as well as requiring physical presence of key executives there.

"It sounds easy enough when you are just scheduling quarterly board meetings in some exotic locations," said Mario Ponce, a corporate partner at law firm Simpson Thacher & Bartlett LLP.

"But then if you're in the middle of an M&A deal or activist situation and the board has to meet frequently, we've seen this can become an administrative burden." (Reporting by Soyoung Kim in New York, additional reporting by Olivia Oran, Editing by Paritosh Bansal)