Salix shares fall 3% after merger announcement

Posted by David Bracken on July 9, 2014 

Shares of Salix Pharmaceuticals fell 3 percent Wednesday as investors game a muted response to the Raleigh company’s plan to merge with the subsidiary of an Italian drug company and reincorporate in Ireland in order to lower its tax rate.

Salix announced Tuesday evening that it will merge with Cosmo Technologies, an Ireland-based subsidiary of Cosmo Pharmaceuticals in a so-called corporate tax-inversion. Salix shareholders will own just under 80 percent of the combined company, while Cosmo shareholders will own the rest.

The company will retain and Salix name and will trade on the Nasdaq stock exchange. Salix’s headquarters will remain in Raleigh, where it employs about 300 people. The deal is expected to close in the fourth quarter.

Sterne Agee analyst Shibani Malhotra said in a research note Wednesday that the deal “seemingly adds significant value.” Malhotra said based on the announced deal terms, Salix is paying $1.74 billion for the Cosmo assets with the deal creating $450 million in value.

The reduction in Salix’s tax rate from 35 percent to the low 20 percent range could be worth the entire amount Salix is paying for Cosmo’s assets, Malhotra said.

Malhotra added that the deal doesn’t alter Salix’s attraction as a possible acquisition target.

“While the deal lowers the company’s tax rate and would thereby reduce the number of companies looking to acquire Salix for tax synergy purposes, it does not preclude a company looking at Salix from an operation-synergies perspective,” Malhotra wrote. “Post inversion, Salix would also be attractive to other US companies that are looking to bring down their tax rates.”

Sterne Agee has a buy rating on Salix stock with a target price of $130 per share. Salix shares closed Wednesday at $133.29, down $3.98.

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