When Mylan entered a so-called ‘spin-version’ transaction last year in a deal where it acquired a $5.3 billion generics business from Abbott Laboratories and shifted its headquarters from Pittsburgh to The Netherlands, little did the pharma giant know the move would help it fend off an unfriendly $40 billion takeover bid from competitor Teva Pharmaceuticals.
But, that’s exactly what may happen.
Mylan’s July 2014 deal with Abbott had two objectives. First off, it bolstered the company’s presence in the global generics marketplace where manufacturers like Canada-based Valeant Pharmaceuticals , Isreal’s Teva Pharmaceuticals, and India-based Ranbaxy Laboratories have picked up share as larger conglomerates like Abbott and Pfizer exit and refocus on their drug pipelines. The deal also was part of a 2014 mad dash in the U.S. to use M&A as a means to shift corporate headquarters into low-tax jurisdictions, predominantly in Europe and the U.K.
To gain the tax benefits of an inversion transaction, however, Mylan had to structure the deal so that Abbott would own over 20% of the stock in the new Netherlands-based parent. As a result, Mylan doled out 105 million of its shares to Abbott to complete the mega deal, which came with hundreds of millions of dollars in tax and operational synergies.
Since the deal was announced, Mylan shares have risen over 40%, keeping pace with the red hot pharmaceutical sector, as drug-makers continue a consolidation push to wrench out financial synergies. [Most deals these days lure investors with mid-teens-to-20% earnings and cash flow accretion forecasts, and they’ve drawn major interest from the largest hedge funds in the world]
But Abbott’s 21% block of shares — now down to 14.5% after some sales on the open market — is proving helpful for Mylan.
On Tuesday morning, Abbott Labs expressed its intention to vote its shares in favor of Mylan’s about $30 billion bid for Irish-domiciled competitor Perrigo . Those votes may help Mylan fend off Teva Pharmaceuticals, which is pitching a competing deal to its shareholders.
“[B]y having a large, sympathetic shareholder on the scene, it becomes a lot easier to discourage unwanted takeover efforts. That becomes a hidden benefit of the type of inversion that Mylan accomplished,” says Robert Willens, an independent tax expert.
Teva wants Mylan to tear up its unsolicited bid for Perrigo and instead engage in merger talks. Perrigo hasn’t yet expressed an interest in negotiating a merger with Mylan, however, because of Irish takeover laws that’s a moot point since Mylan is now legally bound launch a tender. Teva, meanwhile, continues to press a case that its deal offers far greater synergies and financial benefits than the Perrigo transaction.
But, Mylan appears skeptical of Teva as a suitor, given it’s relatively weak stock and operational performance in recent years.
At times, it’s even used what Wall Street bankers describe as an exceedingly condescending tone when trying to fend off Teva’s unsolicited offer. Most of the time in pharma M&A, unsolicited bids turn into negotiated deals once a suitor shows a willingness to cut a check that board of the target simply can’t refuse.
That may not be the case in a triangular deal frenzy that’s hooked Mylan, Perrigo and Teva at the hip. In addition to complex takeover laws in The Netherlands and Israel, Abbott’s block of shares may prove a hurdle too high to climb for Teva.
Who knew a controversial inversion deal would continue paying dividends for Mylan, even after its tax savings were achieved?
By Antoine Gara