As I write, Shire (LSE: SHP) (NASDAQ: SHPG.US) shares are trading at £48.40 — 9% below the £53.20 value of AbbVie’s latest takeover proposal, which has been provisionally backed by Shire’s board.
Why?
In my view, there are several reasons why the market is currently unwilling to value Shire shares at AbbVie’s offer price.
1. What about £46.26 instead?
One point that some shareholders may have overlooked is that the firm offer could be worth a lot less than £53.20. In a footnote to Shire’s most recent update, the company says that any firm offer from AbbVie needs to be the greater of £46.26, or the sum of £24.44, plus the value of 0.8960 AbbVie shares at time of the offer.
What this means is that if AbbVie’s share price slides ahead of a firm offer being made, the deal could be worth as little as £46.26 to Shire shareholders.
2. There may not be a firm offer
AbbVie has not yet submitted a firm offer, but it must do so by July 18, after which it will have to withdraw for six months, according to UK Takeover Panel rules.
As far as we know, Shire and AbbVie are still haggling over details, but there’s no way for shareholders to know whether this is just a negotiating ploy, or whether there is a serious stumbling block.
3. Inversion risk
One of the main motivations behind this deal is tax — AbbVie intends to move its tax jurisdiction to the UK, where it will pay much less corporation tax than in the US.
US authorities are understandably uncomfortable with this new fashion, and are currently considering new laws that could suspend or even halt inversion-based takeovers. This is a deal that’s racing against the clock.
4. Who wants AbbVie shares?
Many UK fund managers would be forced to sell their US-listed AbbVie shares. This could push down AbbVie’s share price following the deal.
Private investors wanting to sell their AbbVie shares will also face higher dealing costs than usual: for example, my broker, TD Direct, would charge FX and dealing fees totalling 2.4% on a £5,000 transaction.
What should you do?
My view remains that selling at Shire’s current share price is the best deal for Shire shareholders.
Doing this means you can avoid all of the risks above — which combined, are the reason why Shire’s share price is currently 9% below the value of AbbVie’s latest proposal.