Green Reit's founders Stephen Vernon and Pat Gunne are mightily relieved this weekend that they managed on Monday to spring over the last major hurdle standing in the way of the company's planned €1.34 billion sale to London-based Henderson Park.
Company shareholders voted by a majority of 98 per cent to push through the deal, just over 24 hours before the Minister for Finance, Paschal Donohoe, unveiled measures in Budget 2020 that would result in a nasty tax bill of up to €65 million for Henderson Park.
Market and legal sources see very little – if any – room for the UK firm, led by former Goldman Sachs high-flier Nick Weber, to get out of the takeover. The unexpected tax liability, at less than 5 per cent of the total deal, is highly unlikely to be enough for Henderson Park to trigger a material adverse clause (MAC) and walk away.
Market sources estimate that Henderson now faces a capital gains tax (CGT) charge of more than €50 million. Property valuation increases within a Reit are normally tax-exempt. However, that benefit has been wiped out by Donohoe, should a trust exit the stock market within 15 years of floating.
Green Reit floated just over six years ago, as the first trust to take advantage of 2013 enabling legislation. The idea was that while reits generally avoided corporate tax and CGT, individual shareholders were on the tax hook as they must receive, by way of dividends, 85 per cent of a reit’s annual rental profits.
There is little doubt that the Green Reit transaction was the Government's target in the crackdown
“The reit framework was introduced to promote stable, long-term investment in rental property by removing a double layer of tax that would otherwise apply on collective investment,” Donohoe said in his budget speech. “It is not intended to provide an exemption from tax on income or gains, and the amendments I am introducing will ensure that this objective is upheld.”
There is little doubt that the Green Reit transaction was the Government's target in the crackdown – following political noise in recent months, led by Sinn Féin finance spokesman Pearse Doherty, over how taxpayers were being "ripped off" in the sale. Otherwise, the new measure would have carried a routine provision – known as a grandfather clause – that the old rules would continue to apply for live transactions.
Disquiet over the Green Reit sale also appears to be the catalyst for Donohoe slapping an immediate 1 per cent stamp duty on the type of takeover structure that was being used for the deal – a so-called scheme of arrangement involving the cancellation of existing shares and issue of fresh stock by the seller. Such a manoeuvre previously got around a 1 per cent levy that normally applies to share transactions.
The UK clamped down on this device in 2015 – but the regulations were grandfathered to exclude companies that were subject at the time to takeover talks.
The rush to capture the Green Reit deal, however, with the new 1 per cent stamp duty has netted an even bigger fish for Donohoe: US drugmaker AbbVie, as it prepares to buy Allergan, the Irish-domiciled maker of Botox, in a $63 billion (€57.2 billion) deal that was announced in July.
AbbVie is really collateral damage as it faces a €572 million stamp duty bill on the Allergan purchase.
The irony, of course, is that AbbVie's previous look at an Ireland-based pharma group, Shire, in 2014 was mainly about actually securing a massive tax advantage through one of the so-called corporate "inversion" deals that were all the rage at the time.
A combined AbbVie and Allergan would have its main offices in Chicago and be incorporated in Delaware
AbbVie had said at the time that a $55 billion tie-up would lower its tax rate to 13 per cent from 22 per cent by reversing into Shire. But rule changes introduced by the Obama administration around that time make the financial engineering less attractive to acquiring companies.
Meanwhile, even stricter rules brought in by Obama’s officials in 2016 scuppered a tax-driven $160 billion plan by US pharma giant Pfizer to buy Allergan.
Of course, Allergan secured its base in Ireland through another series of dizzying inversions that involved – deep breath – then US-based Allergan completing an acquisition in 2015 of Irish-based Actavis, which itself had landed a headquarters in Ireland by buying Irish-registered Warner Chilcott in 2013.
AbbVie's interest in an Irish-based company this time round is not about the taxes. It's all about diversifying sales, taking advantage of a cheap target, and spotting an opportunity to further drive Botox's growth. Major corporate tax changes signed off on by Donald Trump in late 2017 make it more attractive for US companies to stay at home. A combined AbbVie and Allergan would have its main offices in Chicago and be incorporated in Delaware.
Meanwhile, as Allergan holds an extraordinary shareholder meeting on the takeover in a Dublin hotel on Monday morning, there is little chance of AbbVie walking away.
Documents relating to the deal show that AbbVie faces having to pay its target a 2 per cent termination fee – equating to $1.26 billion – if it backs out.
It looks like it’s going to have to suck it up.