We hosted a call with a leading policy advocate firm today regarding the Treasury's new rules on permitted M&A inversions. The 40 minute call outlines the latest specifics on the new rules. 3 main takeaways are:
1.) The new language retroactively adjusts the equity contribution of a serial inverter (foreign company in this example). Thus the prior acquisitions of the foreign company are retroactively stripped out for the past 36 months and then that smaller equity amount is counted with the equity of the U.S. acquirer to establish allowable ownership ranges to invert. For example the original Pfizer/Allergan deal resulted in PFE equity in the proforma company of 56%, avoiding the restriction band of 60-80% of U.S. ownership. At 60-80% of U.S. equity percentages (in a combination), Treasury doesn't break up the deal however the benefits of the inversion are nil. At above 80% U.S. ownership, the government treats the combined companies as U.S. based completely, negating the inversion even if the corporate address is foreign. Under these new rules, PFE/Allergan went to 80% U.S. ownership (as the Allergan equity was brought down as its prior deals were stripped out) and hence the deal was called off.
2.) There have been 50 inversions since 1982, but 20 deals since 2012. Total M&A activity from inversions is roughly 5% on a dollar value as deal tickets have tended to be large. Greater than 50% of all inversion activity has been in the Healthcare group.
3.) The earnings stripping parameter goes into effect in 90 days or in June of this year and essentially classifies an intracompany loan of bigger than $50 million as subject to new Treasury regs. If a loan, for example, is characterized as an expanded group instrument, or EGI, then the capital is treated as equity, not debt, and taxed as dividends rather than tax deductible interest payments. The latest Treasury version on EGI's expanded coverage to include partnerships and foreign corporations.
Please let us know of any further questions for our speaker,
Jonathan Casteleyn, CFA, CMT