NEW YORK (TheStreet) -- The shares of a number of companies that have announced or been speculated as targets in tax inversion deals are falling after the U.S. Treasury last night issued new regulations that will make such deals less attractive. Tax inversions refer to an acquisition of one company, usually officially based in a country in Europe or elsewhere, by a U.S. company, following which the acquiring company becomes domiciled in the same country as the company that it bought. The switch has the potential to significantly lower the acquiring company's tax rate.
WHAT'S NEW: In an effort to discourage companies from carrying out tax inversion deals, the Treasury last night announced that it would no longer allow companies to access foreign funds without paying U.S. taxes on them. The changes also strengthen a rule requiring former owners of U.S. companies to own less than 80% of the new combined entity, Treasury stated. "For some companies considering mergers, today’s action will mean that inversions no longer make economic sense," it stated, adding that the rule changes apply to deals closed yesterday and beyond.
ANALYST REACTION: FBR Capital analyst Edward Mills had a mixed outlook on the new regulations. Although the new rules appear harsher than expected, they will not end the practice of inversions altogether and the deals that have already been announced should be completed, Mills stated. The Treasury's changes could make an acquisition of Salix (SLXP) by Allergan (AGN) more likely, since the new rules will impact Salix's inversion acquisition of Cosmo Pharmaceuticals, wrote BMO Capital analyst David Maris. Additionally, the changes may put another pharmaceutical inversion deal - Mylan's (MYL) acquisition of Abbott's (ABT) established products business - at risk, added Maris. He kept an Outperform rating on Allergan and an Underperform rating on Mylan. More upbeat on Mylan was Bank of America Merrill Lynch, which says that the company's stock is attractive whether or not an inversion deal gets done. CRT Capital recommended buying Shire (SHPG) on weakness following Treasury's new tax rules. The firm believes its shares are worth $265-$270 on a standalone basis even if its deal to be acquired by AbbVie (ABBV) does not move forward. RBC Capital analyst Michael Yee wrote that, as a result of the rule changes, another drug maker, Auxilium (AUXL) , will not buy Canadian peer QLT, Inc (QLTI) . Consequently, Auxilium will probably be acquired either by Endo (ENDP) , which is already inverted and has made a $28.10 per share bid for Auxilium, or by another drug company, the analyst contended. He kept an Outperform rating on Auxilium.
PRICE ACTION: In mid-morning trading, U.K. drug maker AstraZeneca (AZN) , which has previously turned down an offer to be acquired by the U.S.'s Pfizer (PFE) , sank 3.6% to $72. Medical device maker Medtronic (MDT) , which agreed to buy Covidien (COV) in an inversion deal, fell 2.6% to $64.23, while Covidien gave back 2.4% to $88.28. Burger King (BKW) , which has agreed to buy Canadian donut chain Tim Hortons (THI) in an inversion deal, slipped nearly 1%. Meanwhile, Auxilium lost 0.6%, Abbott declined 1%, Mylan fell 1.5%, Shire dropped 2.2% and Abbvie also slid over 2%.
Reporting by Larry Ramer.