Shares of 'inversion' candidates slide on U.S. tax rule

By Ben Hirschler and Dan Burns LONDON/NEW YORK (Reuters) - The U.S. Treasury's move to curb deals that allow U.S. companies to escape high taxes at home wiped a combined $12.3 billion off the shares of nearly a dozen companies on both sides of the Atlantic on Tuesday, as investors reacted to the surprisingly far-reaching action.

But it was unclear whether the tougher stance adopted by the Obama administration on "inversion" deals that allow companies to escape high U.S. taxes by reincorporating abroad, which followed a wave of public criticism, would end any of the handful of deals currently in the works.

Burger King, which is in the process of an inversion deal with Canada's Tim Horton's (TO:THI), said Tuesday it would proceed with its $11.5 billion deal despite the Treasury actions, saying the transaction was not about the tax benefits.

Nonetheless, the shares of some companies involved in or interested in merger deals were dealt strong blows. In London, AstraZeneca (L:AZN) slid 3.6 percent, while Shire (L:SHP) fell 2.5 percent.

The U.S. Treasury move was seen as adding some risk around the deal for AbbVie (N:ABBV) to buy Shire for $55 billion and might deter Pfizer (N:PFE) from making another attempt to acquire AstraZeneca, after a $118 billion takeover attempt failed in May.

AbbVie slid 1.7 percent in midday U.S. trading, while Pfizer, the biggest U.S. pharmaceutical company, dipped about 0.3 percent.

More than a half dozen other companies in the United States and Europe saw their shares fall on the Treasury action.

Tim Horton was the only stock in the group to gain on the day, with its shares were up 0.2 percent in Toronto, though shares of Burger King Worldwide (N:BKW) were down 1.5 percent in New York.

In announcing the intention for Burger King to proceed with its deal for Tim Horton, the two companies said in a statement: "This deal has always been driven by long-term growth and not by tax benefits."

Investors had been expecting some action from the Obama administration to clamp down on tax-avoidance inversions but the steps announced on Monday were more far-reaching than anticipated, analysts at Deutsche Bank said.

The new rules, effective immediately, will make new inversions more difficult to do and less potentially rewarding - but whether that will be enough to scupper deals that are pending or under consideration is not clear.

The action follows months of political debate, with Democrats urging prompt legislative action and Republicans pushing to address the problem later, perhaps in 2015, as part of a broader overhaul of the loophole-riddled federal tax code.

"Inversion deals now are clearly going to be very difficult to pull off," Navid Malik, head of life sciences research at Cenkos Securities, said.

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That could kill off prospects of Pfizer returning to bid for AstraZeneca at the end of November, when a six-month cooling-off period imposed by British takeover rules comes to an end and the U.S. group can publicly launch a new offer, Malik said.

Other analysts were less certain. Andrew Baum of Citi said the Treasury move would have a limited impact on the economic case for a Pfizer-AstraZeneca deal - though the threat of additional measures could give the U.S. group pause - and he still expects Pfizer to return after the Nov. 26 deadline.

Both Pfizer and AstraZeneca are bound by rules that mean they cannot comment on deal prospects. However, the British firm said previously that the controversial tax issue was a big risk for investors that could cause major delays to any transaction.

The Shire deal may still go ahead, since it is already in train, although AbbVie will likely lose upside from planned tax savings, making the picture uncertain. The transaction is due to be completed in the fourth quarter of 2014.

"Shire has enough momentum in its business and a good enough pipeline that it would be attractive to AbbVie anyway," Malik said. "The tax inversion was the icing on the cake."

Shire and AbbVie officials did not have any immediate comment on the latest developments.

INVERSION SURGE

Other U.S.-listed issues under pressure from the Treasury actions included Abbott Laboratories (N:ABT), down 1.5 percent; Covidien (N:COV), down 2.8 percent; Medtronic (N:MDT), down 3.5 percent; and Mylan (O:MYL), down 0.3 percent.

In Europe, UK-based Smith & Nephew (L:SN) and Swiss biotech group Actelion (VX:ATLN), two other perennial targets of bid speculation, fell 2.8 percent and 2.6 percent, respectively.

Inversions have surged in the past year, pursued by healthcare companies in particular, although the Burger King-Tim Horton's deal shows the appeal extends into other sectors.

Medical technology group Medtronic, meanwhile, is working to close an inversion deal into Ireland with rival Covidien, while Mylan plans to buy certain Abbott's drugs in developed markets outside the United States in another tax-cutting transaction.

About 50 such deals have taken place since the early 1980s, but the pace has picked up, with half of those completed since the 2008-2009 credit crisis, according to a Reuters review.

A key target of Treasury's actions is foreign profits held offshore by U.S. multinationals under a U.S. Internal Revenue Service (IRS) rule that defers taxation on such profits unless and until they are brought into the United States.

One new Treasury rule will prevent inverted companies from using "hopscotch" loans that allow them to avoid dividend taxes when tapping such tax-deferred foreign profits. Another rule will bar inverters from gaining access to the same kinds of profits by using "decontrolling" strategies that restructure foreign units so they are no longer U.S.-controlled.