ZURICH Swiss-listed Cosmo Pharmaceuticals (COPN.S) said on Wednesday it would merge its Irish subsidiary with U.S. firm Salix Pharmaceuticals SLXP.O, the latest in a wave of overseas deal-making by U.S. companies looking to lower their tax bill.
American lawmakers have expressed concern about U.S. corporations shifting tax domiciles abroad, particularly to Ireland, Switzerland and elsewhere in Europe, to avoid taxes. These deals, known as inversions, are still rare but rapidly becoming more commonplace.
High-profile mergers such as Medtronic Inc (MDT.N) and Irish-based Covidien Plc COV.N, Pfizer's (PFE.N) failed $118 billion bid for British rival AstraZeneca (AZN.L) last month and - most recently - AbbVie (ABBV.N), which raised its offer for Shire (SHP.L) overnight, are deals that are driven at least in part by tax considerations.
Shareholders of Salix, which is based in Raleigh, North Carolina, are expected to own nearly 80 percent of a jointly-held Irish unit following a stock swap with the parent company. The deal will add "modestly" to earnings per share from 2016 and more sharply thereafter, the company said.
"[This] establishes tax efficient corporate structure and increases Salix's competitive positioning for future mergers-and acquisitions and product licensing efforts," the American company said in a statement on Wednesday.
Italy-based Cosmo, which turned a profit of 68.7 million euros ($93.71 million) last year, will maintain just over 20 percent of the combined Irish unit.
Cosmo's shares surged on the news, in part because investors had undervalued Cosmo until now, according to dealers. The shares were 8.3 percent higher in early trading, bucking a 0.4 percent drop in the European sector .SXDP.
For Cosmo shareholders, the deal effectively means owning 20 percent of Salix, worth $8.7 billion at current market prices, as well as tapping into future cash flow.
Dealers in Zurich said Cosmo shares were also gaining on the unwinding of an agreement with Valeant Pharmaceuticals (VRX.TO) over an experimental acne treatment, though the Canadian firm would still have right of first refusal should the drug be licensed out.
Salix shareholders will receive one share of the combined subsidiary for each Salix share they currently own through the deal, which is expected to close in the fourth quarter.
The transaction cements ties between Salix and Cosmo, an Italian firm best known for two drugs to treat ulcerative colitis, a chronic disease that causes inflammation and sores in the lining of the large intestine.
Last year, Cosmo's profits were driven by selling a financial investment in Santarus Inc., bought in November by Salix for about $2.6 billion.
Bofa Merrill Lynch advised Salix on the deal, while Cadwalader, Wickersham & Taft and A&L Goodbody were its legal advisors. Jefferies LLC advised Cosmo on the deal, while Procopio, Cory, Hargreaves & Savitch and Byrne Wallace were its legal advisors.
(Reporting By Katharina Bart and Paul Arnold. Additional reporting by Rupert Pretterklieber; Editing by Gareth Jones)