U.S. retailer Walgreen Co WAG.N said it would not use a full takeover of Europe's biggest pharmacy chain, Alliance Boots [ABN.UL], to move its domicile overseas, following fierce criticism of such tax-cutting deals at home.
Walgreen will buy the 55 percent it does not already own of Alliance Boots for 3.13 billion pounds ($5.3 billion) in cash and 144.3 million shares, giving a total deal of about $15 billion.
Walgreen shares fell as much as 16 percent to $58.30 on Wednesday.
The U.S. group said the combined company, with more than 11,000 stores in 10 countries, would keep its tax domicile in the United States, with headquarters in the Chicago area. It is targeting combined revenue for 2016 of $126-130 billion.
Walgreen's retreat is the third major possible tax "inversion" deal to collapse in recent months amid heightened political sensitivity in the United States to such transactions.
Walgreen had been under pressure from investors to shift its tax domicile to Switzerland or Britain as part of the buyout, but the administration of President Barack Obama said on Tuesday it was considering steps to curb such deals.
The pharmacy chain said it was mindful of the public reaction to a potential inversion deal and its role as an "iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs".
"The company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S.," CEO Greg Wasson said in a statement.
He said the company could not find a structure it was sure could withstand extensive scrutiny from U.S. tax authorities.
Wasson will be chief executive of the combined company, to be named Walgreens Boots Alliance Inc. Alliance Boots Executive Chairman Stefano Pessina will be its executive vice-chairman, responsible for strategy and M&A for the combined company.
"Pessina will be integral to solidifying the combined company's position as the big beast in the global drugstore space," said Kelly Tackett, U.S. director of research at retail analytics firm Planet Retail.
"We fully expect more acquisitions to follow, with shoring up its presence in Latin America likely to be first on the agenda," Tackett said.
Following Walgreen's acquisition of 45 percent of Alliance Boots in 2012, Pessina gained an about 8 percent stake in the U.S. company, making him the largest shareholder.
He is expected to remain the largest shareholder in the combined company after the deal closes in 2015, an Alliance Boots spokeswoman said on Wednesday.
After news leaked on Tuesday that Walgreen would not do an inversion deal, shares in the company fell 4.4 percent in regular trading to close at $69.12. Goldman Sachs and Lazard are advising Walgreen on the transaction.
In an inversion, a U.S. corporation buys or sets up a foreign company and then moves its tax domicile to that foreign company and its home country, while leaving core business operations in the United States.
Doing such a deal ends U.S. taxation of the company's foreign profits and makes it easier for the company to take other tax-cutting steps.
Senator Richard Durbin, the senior U.S. senator from Walgreen's home state who is personally close to Obama, had publicly urged the company not to go through with an inversion. Obama himself is a former Illinois senator.
Walgreen announced a new forecast for adjusted earnings per share (EPS) of $4.25-$4.60 for the fiscal year ending August 2016, taking into account lower pharmacy reimbursements and a rapid rise in drug prices.
The company also said it expects to achieve $1 billion in savings by the end of fiscal 2017, including corporate, field and store-level cuts. It said it planned a new $3 billion share repurchase program.
Walgreen expects to close the transaction in the first quarter of 2015, it said.
A consortium led by billionaire Pessina and private equity group Kohlberg Kravis Roberts & Co. L.P. (KKR) took Alliance Boots, which runs the Boots chain of pharmacies that dot main streets across Britain, private in 2007.
Alliance Boots has itself come under attack in the UK for schemes to cut its tax bill, with a charity and a labor union accusing the firm last year of avoiding over 1.1 billion pounds ($1.9 billion) in UK tax since 2008.
Alliance Boots responded by saying it conducts its business and organises its tax affairs strictly in compliance with all applicable law and observes the highest standard of good ethics.
Nine inversion deals have been agreed to this year by U.S. companies ranging from banana distributor Chiquita Brands International Inc CQB.N to drugmaker AbbVie Inc (ABBV.N), and more are being considered. The transactions are occurring at a record pace since the first inversion three decades ago.
But two large inversions recently collapsed: one involved U.S. drugmaker Pfizer Inc (PFE.N); and the other, U.S. advertising company Omnicom Group Inc (OMC.N). Both had targeted European rivals for acquisition, with a tax domicile move abroad included in their plans, but the deals unraveled.
(Additional reporting by Siddharth Cavale in Bangalore; Editing by Mark Potter)