September 3, 2014 / 3:40 PM / 5 years ago

Exclusive: Hospira talks with Danone on $5 billion tax inversion deal stall

LONDON (Reuters) - U.S. drugmaker Hospira’s HSP.N talks to buy the medical nutrition unit of Danone DANO.PA and use the deal to move its tax domicile abroad have stalled, according to people familiar with the matter, as attempts by U.S. companies to relocate abroad and cut their tax bills draw growing criticism back home.

Yoghurt produced by French Dairy Group Danone are displayed on a shelf in a supermarket in Lanton, Southwestern France, August 30, 2013. REUTERS/Regis Duvignau

Hospira, a Midwestern pharmaceutical and medical device maker, had been discussing a so-called tax inversion deal under which it would pay roughly $5 billion in cash and stock for the French company’s medical nutrition business. Such a transaction would have allowed Hospira, which has a market value of $9.15 billion, to lower its tax rate and free up its foreign cash.

But the discussions have for now been put on hold and it remains unclear if the proposed deal and its structure could be revived, people familiar with the matter said this week, asking not to be named because the matter is not public.

It was not immediately clear why the parties paused discussions, but the decision comes as U.S. companies considering tax inversions come under intense pressure from the government and politicians to rethink their plans.

When Hospira’s interest in the Danone business first emerged in July, a senior U.S. senator wrote to the Lake Forest, Illinois-based company urging it not to move its tax base abroad.

Dick Durbin, the No. 2 Democrat in the Senate, represents Illinois and told Chief Executive Michael Ball that Hospira should not “turn its back on American taxpayers and consumers by taking advantage of a tax loophole called ‘inversion’”.

Analysts also questioned the strategic fit between Hospira, the maker of injectable drugs, and the Danone unit, which makes feeding tubes, foods and drinks for people with special nutritional needs.

When Hospira was spun off from Abbott Laboratories ABT.N in 2004, Abbott retained a sizable and profitable medical nutrition business.

Reuters first reported in February that Danone, the world’s biggest yogurt maker, was considering selling the business - even though it has a profit margin above the group average.

Hospira was among a field of bidders including German healthcare group Fresenius and Swiss food company Nestle that also held talks with Danone over the business.

It could not be ascertained if there was another bidder involved in the auction, but one person said the sale process was still ongoing.

While talks with Hospira have stalled for now, any potential deal with the U.S. company does not necessarily have to be predicated on a tax inversion, that person added. “All options are still open. Price, structure and bidder - those are uncertain.”

Spokesmen for Danone in Paris and Hospira in Illinois declined to comment.


So far in 2014, ten corporate inversion transactions have been struck, the most in any given year. Dealmakers now say the market for inversions is slowing, with U.S. companies looking to buy overseas rivals primarily for tax benefits increasingly dismayed by rising prices, administrative hassles and fears of a U.S. government crackdown.

Last month, U.S. retailer Walgreen Co WAG.N bowed to political pressure and ditched attempts to reincorporate in Europe. The largest U.S. pharmacy chain operator was considering using its planned acquisition of European rival Alliance Boots ABN.UL to move its domicile, but has decided to keep its current Illinois tax address.

Danone has been grappling with falling earnings due to weak baby food sales in Asia as a result of a health scare and sluggish dairy sales in Europe due to slow consumption and a jump in milk prices.

On Tuesday it said that Chairman and Chief Executive Franck Riboud would split his role after 18 years at the helm of the world’s largest yoghurt maker.

Riboud, 58, who took over from his late father, Antoine Riboud, in 1996, will remain as chairman and focus on the company’s long-term strategy while Emmanuel Faber, 50, the chief operating officer, will become CEO, effective Oct. 1.

A sale could enable Danone to use the proceeds to fund an expansion of its faster-growing baby food and dairy businesses, targeting acquisitions in Asia and Africa, analysts say.

For the $30 billion medical nutrition market as a whole, about three-quarters consists of nutrition products delivered orally or through a feeding tube, according to analysts from Exane BNP Paribas.

That portion of the market is led by Abbott Laboratories ABT.N, with a 30 percent share, followed by Nestle NESN.VX with 25 percent and Danone with 16 percent. Smaller players include Fresenius FREG.DE and Mead Johnson Nutrition MJN.N.

The remainder is in nutrition delivered intravenously, and is dominated by Baxter International BAX.N, Fresenius, B Braun Melsungen BBRMG.UL and Hospira.

People familiar with the process have said Fresenius and Nestle would have almost certainly faced anti-trust problems were they to acquire the whole business. Danone could now attempt to either split the business among potential suitors or lower price expectations, which could entice private equity players.

If a deal with one of the strategic players failed, private equity funds would probably be interested in Danone Medical Nutrition, which offers appealing growth prospects and has exposure to emerging markets, said people familiar with the situation.

Editing by Soyoung Kim and Tom Pfeiffer

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