Driven by Canada’s lower corporate tax rate, Auxilium Pharmaceuticals (AUXL) plans to merge with QLT Inc. (QLTI), a small Canadian biotechnology company that essentially put itself up for sale last November. With this deal, Auxilium estimates that its long-term effective tax rate could be reduced from the high 30% range to the mid-20% by 2017/18. Auxilium plans to out-license QLT’s single opthalmology asset, QLT091001, indicated for Leber Congenital Amaurosis and Retinitis Pigmentosa. Though an all-stock deal, the QLTI transaction represents a 25% premium for QLTI based on the June 25 closing prices of both companies. QLTI is up 24% in early trading, (a sweet return for PropThink Premium readers who followed our original recommendation), and AUXL is up 4%.
Tax-driven acquisitions (known as inversions) have been in the headlines this quarter following Pfizer’s (PFE) go at British AstraZeneca (AZN) and AbbVie (ABBV) targeting Ireland’s Shire (SHPG) just last week. PropThink suggested owning QLTI last year for just this reason: likely sale to a mid-size American pharmaceutical company and a shareholder-focused board with a history of value creation. The company signaled its willingness to sell or fold when it hired Credit Suisse in November to “evaluate strategic alternatives.” You can read much more about QLTI and understand how we identified this company as a buyout candidate in our previous coverage.
Under the terms of the agreement, a wholly-owned subsidiary of QLT will be merged with and into Auxilium. Current shareholders of Auxilium will receive 3.1359 QLT shares for each Auxilium share. When completed, Auxilium shareholders will own approximately 76% of the combined entity (to be renamed “New Auxilium”) on a fully diluted basis, current QLT shareholders approximately 24%.
The new, combined organization will be led by Auxilium’s current leadership team and will maintain Auxilium’s current offices in Pennsylvania. Auxilium’s current directors are expected to join the merged company’s board, along with two current QLT directors, good news for shareholders given the board’s ability history of smart decision-making (read more).
On a fully diluted basis, New Auxilium will have 215 million shares outstanding. The deal relies on, among other things, the receipt of an opinion that “New Auxilium” will not be treated as a U.S. domestic corporation for federal income tax purposes.
PropThink Premium members who followed our insights and bought QLTI at $5.15 are up 25% on Thursday morning. Try if for just $49.
One or more of PropThink’s contributors are long QLTI.
