Fitch: M&A Premiums Fall on Inversion Crackdown
NEW YORK–(BUSINESS WIRE)–Tax inversion deals have effectively been repriced by the US Treasury signaling an end to “hop-scotch” loans and other tax structuring opportunities, according to Fitch Ratings. AbbVie’s purchase of Shire and the planned merger of Salix Pharmaceuticals and Cosmo Technologies, both pulled since the Treasury announcement, were scuttled by the changed economics. However, Fitch expects companies with global growth ambitions will continue to seek foreign acquisitions to optimize their long-term tax affairs.
The US government has been closely examining tax inversions due to raised public consciousness of the implications of these transactions on the US tax base.
Inversion brings three principal benefits; each of which have been impeded to some extent by the Treasury’s recent notice. It can reduce taxable profits in the US business, unlock unremitted earnings (UFEs) in foreign subsidiaries and allow access to future foreign earnings outside the US tax net, avoiding accumulating UFEs.
Previous inversions offered easy opportunities to unlock offshore cash, such as through so-called ‘hop-scotch loans.’ These transactions lent overseas cash directly from a foreign subsidiary to the new offshore parent, bypassing the US intermediate parent and tax charge. Lending cash from the subsidiary into the US business could have triggered a tax charge as it may have been considered a deemed dividend. The hop-scotch loan provided access to the cash without these concerns. Once released into the foreign parent, the funds could even be lent back down into the US business, giving the domestic business access to the cash and generating a tax deductible interest payment against domestic profits.
The Treasury notice changes the calculus of situations where the company seeking an inversion planned to use offshore cash as a component of funding the transaction.. In instances with a strong business rationale, longer term tax planning advantages and stiff break-up fees, inversion transactions may well still proceed, but at a higher cost to the acquiring company. This is the case in Medtronic’s planned purchase of Covidien, which will now require $16 billion of US debt funding, in part to replace $13.5 billion of offshore cash initially expected to be used as a funding source.
