Vantiv-Worldpay Deal an Inversion That Wasn't

Vantiv Inc. (VNTV) could have opted to move its headquarters to the United Kingdom in the wake of its $10.4 billion purchase of Worldpay Group. Instead, it will stay put in Cincinnati, Ohio. Call it the inversion deal that wasn't.

"It is the first time, as far as I can tell, where a corporation that was perfectly capable of structuring an 'inversion' decided to forgo the opportunity because an inversion would subject its shareholders to tax (on the exchange of their stock for stock of the foreign acquirer) and, more importantly, because 'an inversion may not offer significant value enhancement...over the current structure,'" said New York tax analyst and former Lehman Brothers managing director Bob Willens in an email.

Worldpay Group is a U.K.-based payments processor. Vantiv is one of the largest U.S. merchant acquirers, which allow businesses to accept credit card and debit card payments. Its clients include 11 of the top 25 national retailers.

Cincinnatti will become the global and corporate headquarters of the combined Vantiv-Worldpay, which will be called Worldpay. London will become its international headquarters.

The Obama administration issued a series of tax rules and directives in an effort to curb inversions, including a clampdown on earnings stripping, a technique used by inverted and multinational companies to convert U.S. income to foreign income, thus benefiting from lower tax rates abroad.

What commonly happens in earnings stripping is that corporations make inter-company loans where the debtor is the U.S. company and the creditor a foreign parent. The U.S. subsidiary pays interest on those loans (and uses those payments to reduce taxable income), and the interest income received by the foreign creditor isn't taxed or is taxed at a lower rate.

The Trump administration has indicated it may seek to roll back the Obama-era earnings stripping rules, but thus far, no concrete action has been taken.

With the Obama-era restrictions imposed on cross border deals, most notably the loss of earnings stripping, an inversion is now an "iffy proposition," Willens said.

"What is certain, however, is that the shareholders of the U.S. corporation will be taxed, at the time of the inversion, on the exchange of their stock for stock of the foreign acquiring corporation. Maybe the balance of power has finally shifted," he added. "It used to be that the corporate tax savings from an inversion were more than sufficient to outweigh the shareholder level tax liability imposed on the exchange. Perhaps that is no longer the case and the politicians can cease complaining about inversions."

In other words, the Obama administration's rules may be accomplishing their objective.

It's possible that investor blowback against the $20 billion merger between Huntsman Corporation (HUN) and Clariant AG announced in May could have influenced Vantiv's decision to keep its combined company stateside. The Huntsman-Clariant deal is structured much like an inversion and would see the combined company, HuntsmanClariant, headquartered in Pratteln, Switzerland.

A group of activist investors led by hedge funder Keith Meister have pushed back against the deal, arguing it lacks strategic rationale and undercuts Clariant's strategy of becoming a pure-play specialty chemicals company.

White Tale Holdings, an investment group backed by Meister's Corvex Management hedge fund and the 40 North Investment Group run by David Winter and David Millstone, has amassed a more than 10% stake in Clariant. In response, Clariant has enlisted the help of Goldman Sachs & Co. to fend off the activists.

Willens said it is "entirely possible" that investor resistance to the Huntsman-Clariant deal could have deterred the combined Vantiv-Worldpay from inverting. "I bet it played a role," he said.

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