Actavis Lowers Tax Rate to 17% After Warner Chilcott Deal – Bloomberg

Actavis Inc. (ACT)’s $5 billion deal to buy
Warner Chilcott Plc (WCRX) brings in a new stable of brand-name women’s
health drugs. It also comes with headquarters relocated to
Ireland and lower taxes for the combined company.

The deal is the second by Actavis to combine product
expansion with a major tax advantage that will lower the
company’s tax rate to 17 percent from about 37 percent over the
course of a year. U.S. lawmakers are debating an overhaul of tax
code that may lower the corporate tax, now 35 percent and the
highest in the developed world. As business leaders such as
Apple Inc. (AAPL)’s Tim Cook travel to Washington to testify today on
behalf of lower rates, Actavis Chief Executive Officer Paul Bisaro says his company isn’t waiting for reform.

“What we’re trying to do is level the playing field,”
Bisaro said in a telephone interview.

While the main reason for the deal was Dublin-based Warner
Chilcott’s portfolio of drugs, the tax benefits of basing the
company outside the U.S. were “icing on the cake,” he said.
The company will pay lower U.S. taxes, and lower total taxes.

The acquisition won’t change much about how Actavis
operates other than how it pays taxes. Most of the employees and
leaders will remain in the U.S., and its company’s Parsippany,
New Jersey headquarters will remain the center of operations.

“Everybody loves New Jersey too much, so nobody is willing
to go,” Bisaro said yesterday on a conference call. Executives
“will be spending a lot of time,” in Ireland, “but we don’t
think anyone will be moving.”

Profit Shifting

Previously called Watson Pharmaceuticals, Actavis took the
name of the closely held Zug, Switzerland-based generics maker
it acquired last year for 4.25 billion euros ($5.5 billion). The
company has grown from a largely U.S.-focused generic drugs
company to a multinational with a brand-name arm. Bisaro has
made a lower tax rate a top priority for the company, which is
the largest U.S. maker of generic drugs by market value.

The Watson-Actavis deal cut the company’s tax rate to about
28 percent from 37 percent. The Warner Chilcott purchase will
shave another 10 percentage points off the tax rate. The deal
does so by shifting where Actavis makes its profits to outside
the U.S., taking advantage of Ireland’s 12.5 percent corporate
tax rate.

Bisaro has been outspoken on what he sees as a too high
U.S. tax rate. “We’re at a competitive disadvantage in a global
marketplace because of the U.S. tax structure,” he said in an
interview with Bloomberg in February. That “means,
unfortunately for the U.S. taxpayer and the job seeker, that
we’re forced to move more jobs overseas so we can get a lower
tax rate and be competitive with the ex-U.S. companies.”

Tax Inversions

The U.S. tax code can drive companies into these sorts of
transactions — called tax inversions — because it allows them
to take advantage of lower foreign rates while keeping most of
their actual operations unchanged, said Bret Wells, a professor
at the University of Houston Law Center who studies corporate
tax issues.

Lawmakers have criticized companies that move profits
overseas to lower their taxes. A U.S. Senate report yesterday
found that Apple, the Cupertino, California-based maker of the
iPhone, used offshore entities to avoid billions of dollars in
taxes.

“A company that found remarkable success by harnessing
American ingenuity and the opportunities afforded by the U.S.
economy should not be shifting its profits overseas to avoid the
payment of U.S. tax, purposefully depriving the American people
of revenue,” said Senator John McCain, an Arizona Republican
who co-authored the report by the Senate Permanent Subcommittee
on Investigations.

Budget Deficit

Tax avoidance strategies like that used by Apple “add to
the federal deficit and ought to be closed,” said Senator Carl Levin, the Michigan Democrat who chairs the subcommittee.

Apple, in a statement on its website, defended its
practices and said it paid $6 billion in U.S. taxes last year.
Cook, the CEO, is scheduled to speak today at a Senate hearing.

Actavis is the most recent tax inversion deal. Last year,
Cleveland, Ohio-based Eaton Corp., a hydraulics manufacturer,
bought Ireland-based Cooper Industries Plc for $11.8 billion,
relocated to Ireland, and said it would save about $160 million
in taxes.

The transactions are legal as long as the acquiring, U.S.-
based company gives up at least a 20 percent interest to the
foreign target, Wells said. That’s a substantial hurdle that has
limited the number of such deals.

“You can have a minnow swallowing a whale, but the minnow
has to be 20 percent of the combined company,” he said. “To do
a transaction that size, it needs to be a strategic fit.”

Stock Buybacks

It also means that, unlike a U.S.-based company that houses
some profits overseas, the newly foreign company can use its
profits for whatever it likes, such as share buybacks or
dividends, Wells said, without having to bring cash back to the
U.S. and pay a tax penalty on it.

“This inversion is nirvana. If I’m a U.S. multinational
and I strip profits to my foreign subsidiary, when I repatriate
those earnings back to the U.S. parent then I’m going to have to
deal with the U.S. residual tax. As a foreign-based
multinational, the ultimate parent company of Actavis will not
have to worry about those issues.”

In the Actavis deal, Warner Chilcott investors will receive
0.16 shares of new Actavis stock for each Warner Chilcott share
they own, the companies said yesterday in a statement. The
agreement values each Warner Chilcott share at $20.08, a 4.5
percent premium over the stock’s closing price on May 17.
Including Warner Chilcott’s more than $3 billion in net debt,
the total value of the acquisition is about $8.5 billion.

The combined company will have $11 billion in annual
revenue as Actavis adds gastroenterology and dermatology
businesses, the companies said. Actavis this month rejected an
offer from Mylan Inc. (MYL) for $15 billion, deciding instead to
pursue talks to take over Warner Chilcott, said people familiar
with the matter, Bloomberg News reported on May 14.

To contact the reporter on this story:
Drew Armstrong in New York at
darmstrong17@bloomberg.net

To contact the editor responsible for this story:
Reg Gale at
rgale5@bloomberg.net