THE WALL STREET
Join Tax-Deal Push
Hedge Fund Marcato Seeks to
Interest Big Hotel Companies in Inversion Bid for InterContinental
Aug. 3, 2014 11:49
Adding the latest in-vogue deal maneuver to their playbook, activist
investors are pressing for overseas mergers that can slice tax bills.
A hedge fund is gauging interest in InterContinental Hotels.
In the latest example, Marcato Capital Management LP hired an
investment bank to try to drum up interest from U.S. hotel companies
that could possibly cut down on their tax bills by buying U.K.-based
InterContinental Hotels Group
PLC, according to people familiar with the matter.
The $3 billion activist hedge fund says it owns about a 4% stake in
InterContinental and has
called on the owner of the InterContinental and Holiday Inn
chains to explore a deal. Now, the people said, Marcato is trying to
ramp up the pressure by hiring the bank, Houlihan Lokey, and focusing
on the possibility of a tax-beneficial merger.
A spokeswoman for InterContinental declined to comment.
With these deals,
known as tax
inversions, a U.S. company buys a foreign target and adopts
its home country's domicile or that of another foreign country, with a
tax rate lower than the U.S.'s relatively high 35% corporate rate. For
a deal to qualify as an inversion, shareholders of the acquired
company must receive stock amounting to at least 20% of the resulting
The tactic has become increasingly popular this year, with companies
rushing to keep up with rivals and seal deals before any policy change
that thwarts them.
called on Congress
to stop the flow of companies moving abroad by changing the
The wish lists of activist investors, which typically buy up shares in
companies and urge strategic or financial changes, often reflect a hot
trend in the market.
For much of 2013, for example, as companies bought back shares at
record levels, activists ramped up pressure on the ones that didn't do
Activists have long pushed various moves to lower taxes. They have
urged restaurant chains to put real-estate holdings into tax-efficient
vehicles known as real-estate investment trusts. Energy companies have
been pushed to create similar structures with their pipelines, known
as master limited partnerships.
Now tax inversions are emerging as the latest wedge.
On the U.S. side, Jana Partners LLC, one of the biggest activist
funds, has taken a stake in
Walgreen Co. and wants the
Deerfield, Ill., drugstore company to set up residency overseas.
has the makings of a deal in place—its potential purchase
of the rest of the European drug chain Alliance Boots GmbH that it
doesn't already own. At issue is whether it would change its domicile
for tax purposes in doing such a deal.
Doing so could cut Walgreen's effective tax rate by more than a third,
analysts have said. Walgreen's shares are up about 25% this year.
Walgreen has said it is looking at the option.
has cited tax benefits in his push, so far unwelcome, with Canada's
Valeant Pharmaceuticals International
Inc. to take over
Allergan Inc. of Irvine,
Sachem Head Capital Management, a $1.6 billion New York-based hedge
fund, this year urged
Helen of Troy Ltd. a
Bermuda-based maker of personal-care products, to seek a U.S. buyer.
In a public letter, the hedge fund called Helen of Troy "a potential
candidate for an inversion transaction." Helen of Troy later acquired
U.S. vitamin maker Healthy Directions LLC.
A memo to clients earlier this year from Wachtell, Lipton, Rosen &
Katz, the New York corporate-law firm known for defending clients
against activists, warned "companies have now begun to experience
pressure from shareholders to pursue inversion transactions."
Marcato, based in San Francisco, began building its position in
InterContinental earlier this year when the hedge fund was looking for
ways to gain investment exposure to the surge in tax-inversion deals,
one person familiar with the fund said.
Marcato isn't worried about Congress changing the rules on inversions
because it doesn't expect it to happen soon, according to a person
familiar with the firm's thinking. The hedge fund also believes there
are more than just tax reasons for an InterContinental deal, as a
combination could include cost cuts or other strategic benefits, the
There has already been media speculation InterContinental could be
attractive to such U.S. companies as
Starwood Hotels & Resorts Worldwide
Wyndham Worldwide Corp.
Yet there has been no deal, and the speculation has driven up the
price of InterContinental shares. The company's stock is up 9.5% this
year, making it a relatively expensive target with a $9.4 billion
Meanwhile, Starwood Friday announced an aggressive plan to buy back
$1.1 billion in stock and pay a special dividend, lowering its cash
pile for any deal.
David Benoit at