Tax inversion takes a hit as Walgreen Alliance Boots stays in US
The US drugstore chain Walgreens has abandoned plans to shift its headquarters to Europe as part of its £9bn takeover of the group that owns British high-street stalwartBoots the Chemist.
The US group, which has more than 8,000 US outlets, was under intense political pressure to keep its tax domicile in the US as it pushed ahead with the deal to buy the 55% share of Alliance Boots it does not already own.
The decision is a blow to other US companies with similar tax-cutting plans, such as the US drugmaker Abbvie,which has embarked on a £31bn takeover of UK firm Shire, in pursuit of a UK domicile that will lower its tax bill.
Thedeal spells a massive payday for Stefano Pessina, the Italian billionaire who bought Boots in a heavily debt-funded deal with hedge fund Kohlberg Kravis Roberts in 2007. Pessina will get £1.5bn in cash and £2.95bn of shares, but the 73-year-old dealmaker has no plans to retire, and has been named as executive vice chairman of the combined company.
Walgreens' decision to keep its headquarters in Chicago, rather than take advantage of Alliance Boots' tax domicile in Berne, Switzerland, came after the US Treasury threatened to restrict tax benefits for American firms that go abroad for tax purposes and president Barack Obama accused tax-shifting companies of lacking patriotism.
Greg Wasson, chief executive of the combined company Walgreen Boots Alliance, said the risks of a "significant potential consumer backlash" from changing its tax domicile were too great.
The decision will be a bitter disappointment to Walgreens' shareholders, especiallyGoldman Sachs and a group of hedge funds that had urged the pharmacy group to relocate to Europe to cut its tax bill.
Wasson told investors that Walgreens had done an "extensive study" of an inversion -the process of moving its corporate headquarters out of the US to reduce taxes. But the company feared "a protracted controversy" with tax officials at the Internal Revenue Service that could see it bogged down in litigation for up to 10 years, as well as the potential loss of government contracts.
"The parties could not arrive at a structure … to ensure that the transaction could withstand almost certain intense protracted IRS scrutiny," Wasson told investors. "While we fully understand the significant financial benefits of an inversion, when weighed against the risk, we determined that pursuing a structure that included an inversion was not the right structure for our future enterprise."
On Tuesday the US Treasury secretary Jacob Lew said the Obama administration could act to reduce tax benefits for companies moving overseas for tax purposes without waiting for the approval of Congress. "If Congress doesn't act, we can't wait for months or years to go by and just watch companies make decisions as if nothing will change," Lewtold the New York Times.
According to the paper, 22 US companies have announced an inversion deal since 2011, although the biggest potential deal so far, a hostile takeover of the UK pharmaceutical giant AstraZeneca by its US rival Pfizer, fell through amid the political backlash in both countries.
Obama has argued that US companies pursuing inversions do not deserve to call themselves American companies. "I don't care if it's legal. It's wrong," he said in a speech last month.
Walgreens is paying £3.1bn in cash and £5.9bn in shares to take full control of Alliance Boots, having taken a 45% stake in 2012. The pharmacy group hopes to create "a new global leader in pharmacy-led health and wellbeing retail" that will have 11,000 stores in 10 countries.
Alliance Boots came under fire from tax campaigners, following the 2007 takeover. On Wednesday the union Unite said the company had lowered its UK tax bill by more than £1bn since Pessina and KKR took charge, as it accused the company of "shirking its responsibilities".
Alliance Boots maintains that it has complied with the law and filed transparent financial reports. A spokeswoman said the company paid £90m in UK corporation tax in the most recent tax year, up from £64m in 2012/13.
Company sources said UK consumers would not see any immediate changes in Boots stores as a result of the deal. Boots will keep its headquarters in Nottingham and the company is not planning job losses or an overhaul of Boots stores. In the long run, the deal could see Boots expanding its vaccinations service and opening more pharmacies in health centres. Veteran retail analyst Nick Bubb said Pessina's involvement meant the deal seemed much more like a merger than a takeover. He added: "Although there was a risk that Walgreens drags Boots downmarket, in practice the UK business is likely to be left to its own devices and I don't think the consumer will notice any difference."
