Shire Share Sale – Takeda Acquisition Leads To High Debt and Withholding Taxes

Regular readers on this site will know that I have been a huge fan of Shire stock over the last year. I constantly wrote how cheap the shares of the company were and made purchases at regular intervals using my monthly stock purchase programme.

Even though I first bought Shire shares when they were trading close to current levels back in April 2017, I used my monthly stock purchase programme to average down on the stock as it kept falling. As I kept buying the shares at lower and lower prices, my average price paid per share of Shire was £33. At this price, I was adamant the company was totally undervalued. It looks like I was not the only person that thought so as Takeda pharmaceuticals came knocking with a takeover bid. The bid is valued at a price of between £46 – £49 a share depending on the exchange rate and Takeda stock price.

As written in my article ‘ Averaging Down On A Stock Requires Mental Strength And Conviction’, I sold my shares in Shire for a cool £44 a share. Sure I could have waited for the takeover to go through and get an extra 4% – 10%. But at £44, I thought the risk reward ratio of holding the shares were not in my favour as any number of factors could derail the takeover (regulatory, shareholder vote) and would see the Shire share price come crashing down towards the mid to low 30s.

All in all, I made myself an excellent return of 33% on the stock in the one year that I have held it.

As mentioned before, I don’t like selling shares in the great companies I own. And this past year, sales have happened more than I would have liked due to takeovers. This is concerning – especially from a UK perspective – as high quality London listed companies such as Fidess aand ZPG have left the stock market. This reduces my investable universe as I only want to own high quality shares for the long term. And with the sale of Shire, that investable universe has shrunk just that bit more. 

My Concern With The Shire Takeda Deal

In a word debt. This is a huge problem that will result from the takeover of Shire By Takeda Pharmaceuticals.

Takeda is aiming to attain a $30.85bn fully underwritten bridge facility in order to finance the transaction. Add this to this the debt currently carried on the balance sheets of both Shire and Takeda (approx $24.5bn of debt) and you can see what strain the balance sheet of the enlarged entity will be put under. The debt equates to a debt-ebitda ratio above 5 which is way more than I am comfortable with.

Although I still feel Shire has a very good pipeline and got taken out on the cheap, I do not want to be invested in the new entity due to concerns I have about the balance sheet. I thus sold my shares as described above.

Furthermore, it is important to note that as a UK investor, any dividends received from the enlarged entity will be subject to a Japanese dividend withholding tax of 20%. This is too large an amount for a stock that is going to produce a decent chunk of its total return via dividends.

The withholding tax on dividends is one of the reasons I hate UK based companies being taken over by foreign entities. Just look at my example on Royal Dutch Shell (RDSA vs RDSB) to see how buying the wrong shares can cost you a substantial  sum over time. Let’s hope any takeovers in the future are kept local or at least have their headquarters in the UK.