Mylan and Abbott Just Got More Interesting

In a bid to lower corporate tax rates and recapture cash-trapped overseas, U.S. companies are rushing to orchestrate deals with overseas competitors.

Mylan (NASDAQ: MYL  ) is the latest company to embrace the tax-busting tactic, by agreeing this week to form a new Netherlands-based company that will not only include its existing business, but a sizable chunk of Abbott Labs (NYSE: ABT  )  drug business, too.

Source: Mylan

First, a bit of background
Abbott Labs has been searching for ways to boost its growth rate since separating from AbbVie in early 2013. Abbott's postsplit business includes four business segments, none of which posted year-over-year growth north of 5% last quarter.

One of those four businesses is its established pharmaceuticals segment, which comprises a portfolio of generic and specialty drugs sold in both emerging and non-U.S. developed markets.

Despite demographic trends supporting drug demand, this business didn't post year-over-year growth in the first quarter as weak results in Europe and Japan weighed down strong results in emerging markets including India and China.

While Abbott's drug business has stalled, Mylan's business continues to grow. The company is a dominant player in global generics, rolling out hundreds of new generic alternatives every year. As a result, Mylan's sales were roughly $7 billion in 2013 and sales totaled $1.72 billion in the first quarter, up from $1.63 billion last year.

Source: Department of Veteran Affairs

Two birds with one stone
The transaction accomplishes some important objectives for both companies.

By selling its non-U.S. developed markets branded drug business to Mylan for shares worth around $5.3 billion, Abbott unwinds a low to no growth business that had been facing stiff price competition.

Although the deal reduces Abbott's earnings per share by $0.22 per share next year, it is expected to boost Abbott's future net income growth by 2% a year. Abbott plans to eventually unwind its 21% Mylan stake, which would give it more flexibility for buybacks or bolt-on acquisitions.

Meanwhile, Mylan gains immediate scale that it believes will generate $200 million in pretax operating efficiencies over the first three years. Importantly, Mylan investors will see the newly acquired portfolio immediately add to earnings per share. The company expects EPS will be $0.25 higher in the first year and is guiding for its EPS to increase through 2018 as those operating efficiencies are realized.

Mylan also gets the opportunity to convert itself from a U.S. company to one domiciled in Europe.

Mylan expects that this inversion will result in a tax rate in the 20% to 21% range immediately (down from about 25% today), with its tax rate settling out in the high teens over time. Since the U.S. taxes income overseas at U.S. rates (minus taxes paid in other countries) when it's brought back to the states, the deal should also give Mylan more flexibility in tapping cash generated overseas.

Fool-worthy final thoughts
Abbott and Mylan's deal gives investors in both companies something to like. Abbott gains flexibility and a faster growth rate and Mylan gets a solid cast of new products, a bump up in earnings and clarity into its future tax obligations.

But there is one big question mark and that's how long Abbott plans to stick around. Abbott's 105 million share stake in Mylan will be massive and given Abbott plans to sell, investors are right to wonder how Abbott will do that without sending shares lower.

Perhaps, Abbott will find a private equity firm or big pharma company to take the entire stake, but that's purely speculation at this point.

This deal may help Abbott's dividend, but Abbott could still have a tough time keeping up with these top dividend picks
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3029016, ~/Articles/ArticleHandler.aspx, 9/4/2015 1:50:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
ABT $44.14 Down -0.10 -0.23%
Abbott Laboratorie… CAPS Rating: *****
MYL $47.42 Down -1.20 -2.47%
Mylan CAPS Rating: *****