AbbVie Set to Acquire UK-Based Shire in Q4

AbbVie Inc. ABBV and Shire SHPG have finally reached an agreement regarding the proposed acquisition of the latter by the former. As per the terms of the merger, AbbVie will pay approximately £53.19 per Shire share (£24.44 in cash and 0.8960 ordinary shares of the merged company for each Shire share). The deal is valued at £31.83 billion or approximately $54.5 billion.

The agreed takeover price of £53.19 per Shire share represents a whopping 53% premium over the unaffected stock price of Shire before merger talks surfaced on May 2, 2014.

If the deal goes through, Shire shareholders will have approximately 25% ownership in the post-merger entity, with AbbVie retaining the rest. The deal is expected to close in the fourth quarter of 2014.

However, AbbVie will be obligated to make a break-fee payment equal to 3% of the total deal value (approximately $1.6 billion) if it decides to walk away from the deal. Meanwhile, if AbbVie shareholders vote against the takeover, the company will pay Shire at least $500 million (up to 1% of the deal value) to compensate for costs, losses and expenses related to the deal.

Both AbbVie and Shire shares gained 2.60% and 1.43% on the news.

What's in it for AbbVie?

The acquisition of Shire will not only add multi-million dollar generating products to AbbVie's portfolio including rare disease drugs, it will also reduce its dependence on Humira. Humira accounted for approximately 57% of the company's total revenues in 2013. Humira is set to go off-patent in the U.S. in Dec 2016 and the EU in Apr 2018.

AbbVie expects the deal to be accretive to its earnings in the first year following the completion of the acquisition. Earnings are expected to increase more than $1.00 per share by 2020 due to financial and operating synergies.

AbbVie intends to form a new listed holding company in the U.S. post acquisition with a UK tax domicile. The deal is expected to reduce AbbVie's effective tax rate to approximately 13% by 2016 from the current effective tax rate (early twenties).

We remind investors that earlier this year, Pfizer Inc. PFE was actively pursuing AstraZeneca AZN primarily motivated by potential tax benefits. However, deal did not materialize.

AbbVie carries a Zacks Rank #2 (Buy) while Shire holds a Zacks Rank #3 (Hold). AstraZeneca is a well-ranked stock in the health care sector holding the same Zacks Rank as AbbVie.

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