Salix Pharmaceuticals: The Newest Inversion Play

Wall Street Journal

Maureen Farrell

Jul 08, 2014

Another day. Another inversion. This one, though, with a twist.

On Tuesday evening, U.S.-based Salix Pharmaceuticals Ltd.SLXP -2.90% announced plans to merge with a unit of Cosmo Technologies Ltd.’s and take up residence in Ireland for tax purposes. What makes this different from a typical inversion deal is the fact that Salix Pharmaceuticals is buying a division of the Italian company that will be spun out.

Salix’s CEO Carolyn Logan touted future tax savings as a key benefit of the deal. Ms. Logan said on a conference call that the company expects to lower its tax rate to the low 20% range from the high 30% range with this deal.

As U.S. companies race to ink deals to find lower tax rates overseas ahead of a possible crackdown by Congress, at least one analyst thinks this deal offers a blueprint for other types of inversion deals.

“This deal may not qualify as an investment banking masterpiece, but it illustrates the possibility of inverting with just a portion of a company, rather than an entire company,” Don Bilson, of the research firm Gordon Haskett writes in a note.

Mr. Bilson explains that this deal could incite a much wider universe of companies to consider inversions. Mr. Bilson said that U.S. LED maker Cree could look at this method to acquire Royal Philips’ announced spin off of its LED and automotive lighting units. Additionally should Siemens SIE.XE -2.05% spin off its diagnostics unit, medical imaging company Hologic HOLX +0.71% could consider acquiring it, he said.

Meanwhile while Salix’s executives said they plan to stay in Raleigh, N.C., they specifically noted that all future M&A done by the company will be done through the companies new structure, i.e. with Ireland’s tax benefits.

While many firms have tried to keep quiet about the benefits of inversions as lawmakers clamor for changes to tax policy, Salix’s CEO refused to apologize for seeking out lower taxes for the company.

On Tuesday’s conference call, Ms. Logan said: “We believe we have every right to this transaction. It’s something our shareholders have talked to us about numerous times, and have, in fact, encouraged us to do so.”