Shire (LSE: SHP) and AstraZeneca (LSE: AZN) (NYSE: AZN,US) fell heavily on Tuesday, with Shire falling as much as 6% at one point, after it emerged that the US Treasury had introduced rules to stop so called tax inversion deals.
Astra and Shire have both been the targets of US companies seeking to shift their tax base overseas through inversions. Indeed, Shire agreed to a takeover by US drugs giant AbbVie earlier this year as the American group sought to relocate its tax base to the UK.
However, as details of the Treasury’s plans were assessed by analysts, it became clear that inversion deals were not off the table just yet. There are ways for companies to work around the rules.
So, after yesterday’s premature declines, is it time to buy in?
Complicated rules
According to City analysts, rules introduced by the US Treasury, designed to stop inversions won’t actually stop deals, although the new rules will make deals more complicated.
In particular, the Treasury’s new rules eliminated certain techniques companies use to gain tax-free access to overseas earnings. These rules became effective immediately, impacting transactions such as Shire’s, which have not closed yet.
Shifting tax base by effectively acquiring a foreign domicile, allows companies to shelter overseas income from the high US corporate tax rate of 35%. The UK’s 2014 corporate tax rate is only 21%. So, it’s easy to see why companies would continue to peruse deals even if they become more complicated and expensive.
According to analysts, a way to get around the Treasury’s rules has already been discovered. Specifically, the rules only apply to deals that are 80% foreign owned. This indicates that deals could still go through if less than 80% of the foreign entity was purchased.
Time to buy?
This is why it could be time to buy Shire and Astra after recent declines. You see, it’s likely that inversion deals will continue as companies circumnavigate the Treasury’s new rules.
Actually, with Shire’s shares currently trading just below AbbVie’s offer of £52.48 per share in cash and stock, it seems as if the City does believe that the deal will go ahead in its current form.
What’s more, Astra remains an attractive takeover target for Pfizer as, even if inversions become more complicated, Pfizer would save billions in tax from any deal. Despite the complications, a deal would be worth pushing through.
Long-term
Of course, there is still a small risk that the US Treasury could ban inversions altogether. Nevertheless, even if a drastic move such as this were to go ahead, due to their defensive nature, Shire and Astra remain great long-term buys.
