Fitch: Inversion Crackdown Breaks Salix-Cosmo; Others Move Ahead

NEW YORK--()--Tightened tax rules on U.S. companies seeking to re-domicile headquarters in countries with more favorable tax systems are pressuring some companies to reconsider that type of strategic move, according to Fitch Ratings.

On Thursday October 2, Salix Pharmaceuticals (Salix) ended its $2.7 billion merger agreement with Cosmo Pharmaceuticals (Cosmo), saying a "changed political environment has created more uncertainty" regarding any benefit the company had expected to receive via a transaction.

Changes announced under the new regulation include taxing certain intercompany loans. This potentially subjects foreign undistributed earnings to taxation where these are indirectly repatriated to the US through the new corporate structure as so-called 'hop-scotch loans'.

It remains unclear how many other firms with similar inversion deals pending will reconsider or alter their plans; several announced transactions lie in wait. In the healthcare sector, these include Abbvie's merger with Shire, Medtronic's acquisition of Covidien, and the sale of Abbott Labs' non-US generic drug unit to Mylan.

As the new U.S. Department of Treasury rules aim to make access to non-US cash for inverted firms more difficult, other inversion deals could be affected. Ensuring completion of these deals could mean incremental external financing may be required. This could possibly result in higher gross debt leverage and/or longer repayment horizons. Some deals, like Salix-Cosmo, could fall apart if the incremental cost of such financing is too great.

In response to the new rules, Medtronic reaffirmed its commitment to purchase Covidien on Friday October 3, saying it will use approximately $16 billion in new US debt financing for the acquisition and will not use approximately $13.5 billion of cash from its foreign subsidiaries. The funding plan will result in higher gross leverage and interest expense for the next several years, according to the company. Medtronic stated in its press release that all terms and conditions of the merger agreement remain unchanged.

Companies in other sectors are also considering pending inversion deals. Burger King Worldwide's deal with Canadian-based Tim Hortons likely will not be deterred by the new rules as Fitch believes the structure of the combination transaction will help the firm avoid some challenges. U.S.-based Chiquita Brands International, Inc.'s (Chiquita) proposed all-stock acquisition of Dublin-based Fyffes plc, which would create the world's largest banana company, also remains on the table as Chiquita also evaluates an unsolicited $13 per share cash buyout offer from Brazilian-based juice company Cutrale Group and investment firm Safra Group.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Jacob Bostwick
Director
Corporate Finance, Healthcare
+1 312 368-3169
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
John Boulton
Director
Credit Policy
+44 20 3530 1673
Fitch Ratings
30 North Colonnade, Canary Wharf
London
or
Carla Norfleet Taylor, CFA
Director, Corporates
+1 312 368-3195
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
Fitch Ratings
33 Whitehall Street
New York, NY
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Jacob Bostwick
Director
Corporate Finance, Healthcare
+1 312 368-3169
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
John Boulton
Director
Credit Policy
+44 20 3530 1673
Fitch Ratings
30 North Colonnade, Canary Wharf
London
or
Carla Norfleet Taylor, CFA
Director, Corporates
+1 312 368-3195
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
Fitch Ratings
33 Whitehall Street
New York, NY
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com