Whenever Corporate America faces off with Washington lawmakers, one outcome is usually guaranteed…
And the latest conflict – following a statement from President Obama and the Democrats last Thursday – is quickly shaping up to be a true battle royale.
This new policy not only demonstrates Washington’s “Regulate Everything” culture… it also threatens the financial well-being of America’s corporations – and, in turn, your own wealth.
The Urge to “Invert”
These days, much of the sparks between Corporate America and Washington concern Uncle Sam sticking his grubby hands in the corporate cookie jar, and making off with obscene amounts of tax revenue.
Stifled by America’s excessive taxation policies, a slew of companies have essentially expatriated from the United States in a process known as “corporate inversion.”
It’s a technique where companies restructure their businesses abroad, in hopes of reducing their tax burden. This includes re-incorporating under a wholly owned international subsidiary, or simply buying a foreign company outright.
With their tax domicile then based in that country, the Internal Revenue Service can’t touch their earnings.
The technique itself is nothing new. The first inversion deal was done in 1982, but the trend has set a record pace recently, as U.S. companies – particularly healthcare and biotechs – divert overseas, as they battle for any competitive advantage they can get.
Those who’ve done so are already reaping rewards. For example, Ireland has proved particularly popular…
- New Jersey-based Actavis (ACT) acquired Dublin’s Warner Chilcott (WCRX) in an $8.5-billion deal… and promptly “inverted” its business to tax-friendly Ireland.
- Chicago’s AbbVie Inc. (ABBV) recently just closed a deal with another Dublin-based firm, Shire plc (SHPG).
- Global medical device leader, Medtronic (MDT), shelled out $42.9 billion to buy Covidien plc (COV), which is based in Massachusetts, but incorporated in Ireland.
This year alone, we’ve seen nine inversion deals finalized.
Take that, Washington!
But as you’d expect, politicians are eager to stop this practice.
In fact, just last week, President Obama outlined his intention to close a loophole that allows companies to avoid U.S. taxes by basing themselves abroad.
More specifically, Obama is supporting Democrat-led anti-inversion bills that would see companies with half their business in the United States be considered U.S.-domiciled for tax purposes.
Quoted on Reuters, a White House official stated, “We can’t afford to wait to reform our tax code to deal with inversion,” while claiming that inversion deals would cost the United States an estimated $17 billion in lost tax revenue over the next decade.
Of course, there’s no guarantee that a bill will pass. But while the loophole still exists – and even amid Washington’s attempts to close it – there’s little sign of the trend slowing. U.S. companies still want to get deals done to reap tax benefits while they still can. (And naturally, they hope that a bill doesn’t pass.)
So which companies are ripe for the picking?
Inversion Investment #1: Bajan Bucks
If you’re in the healthcare or biotech sector, and seeking a generous tax break, Barbados is a top destination.
Barbados is revered as one of the world’s most corporate-friendly tax havens, boasting 14 very favorable tax treaties with various countries – including the United States.
And it doesn’t get much better than Concordia Healthcare Corp. (CXR.TO). Why?
Well, for a start, the firm is based in Toronto – which, in itself, makes the company an attractive proposition for American companies looking to “invert.”
Second, it pulls in a large chunk of revenue from its Barbados-based subsidiary, Concordia Pharmaceuticals. All told, Concordia Healthcare sports a blended tax rate in the single digits.
In fact, Concordia was close to finalizing an inversion deal with an undisclosed U.S. firm in early 2014. But issues over the valuation ended the conversation.
This not only makes CXR an attractive corporate investment, but also a good option for retail investors, as it won’t settle for anything less than its intrinsic value.
And who can blame it? After going public as recently as January, Concordia’s stock has surged from $7.80 to $36.70 – a 370% surge.
As the inversion trend continues, Concordia remains a compelling target.
Inversion Investment #2: The Luck of the Irish
As I mentioned earlier, Ireland is a very popular place for corporate inversions.
Indeed, on July 14, Israeli newspaper, Globes, reported that Dublin-based Perrigo plc (PRGO), which manufactures generic and over-the-counter drugs, had hired a team of investment bankers to help it consider a potential buyout.
The potential suitor?
None other than $64-billion behemoth, Abbott Laboratories (ABT). Abbott is a well-established worldwide manufacturer and distributor of healthcare products, with a segment of its business devoted to pharmaceuticals.
Perrigo shares shot up nearly 10% on the news.
Some argue that Perrigo isn’t the right move for Abbott. But amid that debate, one thing remains undisputed: Perrigo is a prime takeover target.
Jefferies analyst, David Steinberg, notes that “Perrigo is an attractive candidate for certain strategic buyers, due to its durable, highly cash-flow-generative business model.”
I agree. Over the last five years, Perrigo boasts a free-cash-flow (FCF) growth rate of 20.7%.
But it’s even more attractive when you consider the 10-year FCF growth rate of 25%. This proves the company’s ability to consistently generate money for expanding its business, paying down debt, and offering its $0.42 annual dividend per share.
And the fact that Perrigo operates in Ireland – a feat it accomplished through an inversion buyout of Elan Corporation – merely sweetens the deal. Why?
Because Ireland offers an extremely low corporate tax rate of only 12.5%. It’s a primary reason why AbbVie recently purchased Shire. The inversion deal will reportedly save AbbVie $8 billion in taxes.
In “Lew” of it All…
You can see why Washington isn’t too thrilled with this recent surge in expatriation. All told, the future potential losses are massive…
According to Goldman Sachs (GS), United States faces nearly $40 billion loss of pre-tax income from 2014 inversion deals alone.
U.S. Treasury Secretary, Jack Lew, has urged Congress to crack down on foreign merger deals, citing “economic patriotism” as the main reason.
Give me a break…
My guess is that companies would choose being rich over being patriotic.
The Obama administration shares that concern, as it hustles to push through new legislation that will close the loophole and retroactively eliminate the tax breaks for most of this year’s inversion deals.
We’ll see how its efforts turn out. In the meantime, get in on the companies I mentioned while the getting’s good.
Your eyes in the Pipeline,