October 22, 2014 / 5:35 PM / 6 years ago

UPDATE 2-Abbott, Mylan silent on why changing tax-inversion terms

(Adds analyst, banker comments, companies declining explanations)

By Caroline Humer and Ransdell Pierson

Oct 22 (Reuters) - Drugmakers Abbott Laboratories and Mylan Inc on Wednesday declined to explain in detail why they changed the terms of a $5.3 billion deal in which Mylan will buy part of Abbott’s overseas generics business and reincorporate for tax purposes in the Netherlands.

Analysts and banking experts said the changes were almost certainly aimed at protecting tax gains from the so-called “inversion” deal, one of several to surface in recent months in which U.S. companies seek to shift their tax domiciles abroad.

The altered contract for the deal came a month after the Treasury Department made changes to U.S. tax rules aimed at discouraging inversion deals, which the Obama administration sees as a threat to the U.S. corporate tax base.

“The (tax law) changes from Treasury are making people re-look at deal terms, and deals are not as favorable now,” said Edward Jones analyst Jeff Windau. “That’s what happened here, there had to be some tweaks” in the Abbott/Mylan contract.

Windau said many investors had feared the new Treasury rules might derail the deal, and they took comfort in statements by both Abbott and Pittsburgh-based Mylan on Wednesday that the transaction would go through in the first quarter of 2015.

“People assume this has to do with proposed regulatory actions by Treasury,” said Josh Jennings, an analyst with Cowen and Co. “I don’t know what their advisors told them to do. I would have appreciated more information.”

Concern about the Treasury rule changes prompted AbbVie , an Abbott spinoff, earlier this week to walk away from its planned $55 billion purchase of Ireland-based drugmaker Shire Plc.

Provisions of the Abbott/Mylan deal have been changed, Mylan said in a regulatory filing on Wednesday. One change is that Mylan will get better pricing terms at Abbott facilities that will make and supply products for Mylan. Another change, Mylan said, is that it will issue 110 million shares in the newly formed company to Abbott, 5 million more than the original terms dictated.

Abbott plans to transfer generic drugs that it sells in Europe, Japan, Canada, Australia and New Zealand to a new company in the Netherlands that would also include Mylan’s existing businesses. Mylan shareholders will now own 78 percent of the company and Abbott will own 22 percent. The original terms called for a 79 percent/21 percent split.

Under long-standing Treasury rules, a company that wants to take up tax citizenship in a new country must be less than 80-percent owned by its original U.S. investors. That rule was tightened last month to make it harder for companies to evade the 80-20 rule by slimming down on the U.S. side, or bulking up on the non-U.S. side, through financial maneuvers.

Christopher Geier, partner in charge of the investment banking practice at Sikich, a professional services firm in Naperville, Illinois, said the contract changes apparently were made to help ensure that old Mylan shareholders own less than 80 percent of the new company.

As for why the companies have not more fully explained the tweaks to their deal, Geier said, “To the extent they can do these things and not violate any sort of disclosure things they will, and you almost can’t blame them for that.”

Abbott spokesman Scott Stoffel and Mylan spokeswoman Nina Devlin said they could not comment about the contract changes, beyond the limited details included in their separate regulatory filings and on an Abbott conference call.

Abbott earlier on Wednesday said its third-quarter sales, including generics to be sold to Mylan which are now considered discontinued products, rose 4.7 percent to $5.6 billion, which was in line with Wall Street expectations. (Additional reporting by Kevin Drawbaugh in Washington and Bill Berkrot in New York; Editing by Eric Effron and Lisa Shumaker)

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