Walgreens investors push for earlier takeover of Boots

Aim to use 'tax inversion' to cut huge tax bill

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US drugstore chain Walgreens is believed to be bringing forward its takeover of Boots in an effort to cut its tax bill.

Boots was founded by John Boot in Nottingham in 1849, but last year signed a takeover deal with Walgreens, the US' largest retail pharmacist. Under this deal, Walgreens took a 45 percent stake in Alliance Boots with the option of buying the rest of the company in February next year.


Now, though, the Sunday Times claims that hedge fund investors are pushing for an earlier takeover, valuing Alliance Boots at around £10.5 billion. A group including US funds Och Ziff, Jana Partners and Corvex has built up a five percent stake in Walgreens over recent months. This group is now reported to be pushing for the company to move its tax domicile to either the UK, where Alliance Boots is headquartered, or Switzerland, where it's currently domiciled for tax purposes.

"This tactic, known as tax inversion, will be beneficial for Walgreens in drastically reducing its taxable income which it has to pay in the US – a country with one of the top corporate tax rates in the world," says financial analyst firm Zacks in a research note.

The move would cut its rate of tax from an estimated 37.5 percent to just 20 percent, saving the company billions of dollars a year and allowing it to increase its earnings per share by as much as 75 percent.

"From a shareholder perspective this looks like a logical step, likely to drive enhanced cost savings. The potential tax savings could run into billions of dollars. The UK's 'favourable' tax position will certainly add to the attractiveness of the deal and we may see similar deals emerge," says Professor of Practice Chris Beer of Warwick Business School. He adds: "I can't immediately see any significant change to the Alliance Boots operating model, nor is it likely that jobs in Nottingham would be adversely impacted."

Deals such as this are becoming more frequent as US companies attempt to cut their tax bill. US drugs company Pfizer is currently attempting to take over AstraZeneca, with a similar aim to Walgreens: to use the tax inversion mechanism.

Three years ago, following the takeover of Cadbury by Kraft, changes were made to the UK's Takeover Code to require more information about bidders and their future intentions on job cuts and closures - although many say these changes don't go far enough.

And objections are coming - very forcefully - from the US too, with US senator Carl Levin calling for legislation to outlaw tax inversion. "Companies that exploit this loophole benefit from the protections and services the federal government provides, including patent protection, research and development tax credits, national security and more; they shouldn't be allowed to shift their tax burden onto others," he says.

And this opposition, believes Zacks, could scupper Walgreens' tax inversion plans: "From Walgreens' point of view, the decision may not remain as easy as it seems, taking into consideration the political pressure it would face while relocating," says the analyst firm.