Forest Hills, IL, United States (4E) – Drug manufacturer Hospira and food conglomerate Danone have mutually decided to put matters on hold. The deal is about Hospira purchasing the medical nutrition subsidiary of Danone and at the same time having Hospira to move from its US location to a tax domicile abroad.
The deal is but another sample of tax inversion, where US companies purchase controlling interest in other companies based outside of the United States to avail of more favorable tax systems. The price tag is nearly USD5 billion in cash and stocks, which in turn would allow Hospira to lower its overall tax rate and allow for more savings through foreign sales.
These business decisions have been drawing flak from leaders back in the United States, to the extent that US President Barack Obama had called companies initiating these methods as ‘economic traitors’.
The whole process though has been put on hold with uncertainty surrounding if the deal would ever be completed, according to people familiar with the matter, who sought anonymity on the matter as discussions remained private. One of the identified reasons was the intense pressure coming from the government and politicians as to conducting inversion plans in the future.
When news came out that Hospira is interested in the unit of Danone last July, one Senator had written a letter to Hospira urging it to stay put in the United States. The Senator, Dick Durbin (D. IL) said, in his letter to Hospira CEO Michael Ball, “(Hospira) should not turn its back on American taxpayers and consumers by taking advantage of a tax loophole called ‘inversion’.”
With the announcement of the stalled talks, Hospira’s shares of stock fell by 0.7% to USD53.85 per share.
Aside from government pundits, many industry analysts are questioning how Hospira, a manufacturer of injectable drugs, would fit the Danone unit, which manufactures feeding tubes and other devices needed for those individuals with specialized nutritional needs.
The whole process started when Danone, the world’s largest yogurt maker, announced it would be selling the medical nutritional unit despite being one of the more profitable units in the group. There were many bidders, amongst them German group Fresenius and Swiss food conglomerate Nestle, including Hospira regarding the purchase of the business.
The sale was pushed because of the weak earnings after baby food sales have dropped in Asia because of a health scare. There is also a downturn in dairy sales in Europe, with declining consumption as well as an increase in milk prices. With the sale, Danone may be able to use the proceeds to expand its baby food and dairy business with a push inward to Africa as well as Asia.
As for the issue of tax inversion, for the year 2014, there have been ten transactions conducted. The market for this move is slowing, as more and more US companies choose to purchase overseas for the tax windfall as well as the steady increase in prices, red tape issues and the fear of a crackdown from the home country, the United States.