The recent growth of M&A activity continued into the traditionally slower summer months with 12 strategic deals involving transaction values in excess of $350 million announced during the month of July. However, as stock prices of U.S. listed companies continue to trend upward there were no sponsor-backed going private deals with transaction values in excess of $350 million announced during the same period. Of the deal activity announced in July, we continued to see large industry consolidating acquisitions and tax-reducing acquisitions of offshore companies.
The large industry consolidating acquisitions announced during the month of July included: (i) Reynolds American's $27.4 billion acquisition of Lorillard, (ii) Zillow's $2.63 billion acquisition of Trulia, (iii) Dollar Tree's $8.49 billion acquisition of Family Dollar, and (iv) Twenty-First Century Fox's unsolicited approach of Time Warner for a value estimated at approximately $76 billion (since rejected by Time Warner and withdrawn by Twenty-First Century Fox). While these combined companies will be subject to heightened antitrust scrutiny given the size of the transactions and the parties' positions in their respective industries, the combined company in each case will continue to face formidable competition. In the Reynolds American / Lorillard transaction, the combined company would control approximately 40% of the U.S. cigarette market and would still face significant competition from Altria Group Inc. which controls approximately 50% of the U.S. cigarette market. In the Dollar Tree / Family Dollar transaction, while the combined company would include over 13,000 stores and annual sales in excess of $18 billion, it would still face competition from Dollar General, which operates approximately 11,300 stores and has annual sales in excess of $17.5 billion. Interestingly, Dollar General submitted a higher bid for Family Dollar of $78.50 per Family Dollar share (a 5.4% premium to the price agreed with Dollar Tree), but, on August 21st the Family Dollar board of directors rejected Dollar General's offer given the significant antitrust risk associated with a merger of the two companies. See below for a further discussion of the Family Dollar Transaction. Although the merger of Zillow and Trulia will combine the two most prominent free online resources of real estate listings and information, the parties emphasized in their joint press release announcing the transaction that the combined revenues of the two companies represent less than 4% of the estimated $12 billion spent on marketing by real estate professionals each year.
Tax-reducing acquisitions of offshore companies, by which U.S. companies acquire foreign companies with lower tax rates so they can switch their legal home and lower their tax rates, commonly referred to as an "inversion" transaction, continued in the month of July. In the largest inversion deal to date, AbbVie Inc. a U.S. pharmaceutical company agreed to a merger with Shire PLC, a Jersey-registered, Irish-headquartered pharmaceutical company for a $54 billion cash-and-share offer. AbbVie has indicated that it expects the transaction will reduce its effective tax rate to approximately 13% by 2016 - its tax rate was approximately 22% in 2013. The AbbVie/Shire transaction is just one of approximately ten inversion deals that have either closed or announced through the end of July 2014; however, given the number of recent deals and the size of the AbbVie/Shire transaction, political challenges from Washington to inversion transactions have increased on both sides of the aisle. It remains to be seen whether federal legislation and/or executive action will impede contemplated inversions or preempt future inversions. Much of the political rhetoric has been to accuse corporations that pursue inversions as unpatriotic. However, it is worth noting that many of today's inversions are resulting in U.S. corporations moving to Western European countries that are not considered tax havens. The U.S. corporate tax code differs from most other developed nations, with higher rates and taxation of profits earned abroad by U.S. corporations when they are repatriated to the United States. Many economists, business leaders, foreign finance ministers and even Treasury Secretary Jack Lew have acknowledged that the U.S. corporate tax code needs to be reformed, but Washington gridlock makes this unlikely.
List of Announced Transactions in July 2014
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