Eli Lilly/Elanco Exchange Offer

[ownyourfuture]

I own a substantial number of Eli Lilly shares. They recently offered the following to shareholders.

Eli Lilly & Company (LLY) announced that it will launch an exchange offer for shareholders in order to divest its remaining ownership interest in Elanco Animal Health Incorporated ELAN. di·vest - verb - rid oneself of something that one no longer wants, such as a business interest or investment

Lilly divested its Elanco animal health unit as an independent publicly traded company - Elanco Animal Health - via an initial public offering (IPO) of a minority stake in 2018. Elanco Animal Health started trading on NYSE from Sep 20, 2018. Lilly retained 80.2% stake in the Elanco Animal Health when it completed the IPO, which it wants to divest this year.

Under the exchange offer, Lilly shareholders can exchange all, some, or none of their Lilly shares for shares of Elanco common stock owned by Lilly at a 7.00% discount.

Lilly expects the exchange offer to be tax free, except the cash received in lieu of fractional shares.

https://finance.yahoo.com/news/lilly-begin-exchange-offer-sale-143102398.html

For the following reasons, I'm probably not going to participate.
1: ELAN shares went public in September 2018 @ approximately $36.00, & are now trading under $30.00
2: LLY shares have been on a tear, up around 56.00% over the past year.
3: I'm probably oversimplifying it, but on the surface, it sounds like Eli Lily wants their own shares back, & wants to get rid of the ELAN shares.

My question: What does “Lilly expects the exchange offer to be tax free” actually mean ?
I can't believe that this would mean ‘if’ I chose to participate, the capital gains on the Eli Lilly shares I exchanged, (which are substantial) would be assigned a new cost basis ?

This sounds too good to be true, & we all know the old saying related to that.

 

[Bamaman]

Eli Lily is a leader in their field--one of the best. I'd just keep their stock and be done with it.

 

[sheldon cornped]

I am in the same situation as you and am inclined not to participate. However, if the tax-free aspect resets the cost basis it would be compelling. Have not had time to evaluate, so I'm very interested to see what implications it might have.

 

[splitwdw]

Got bleary eyed reading through the 300 page report. May have missed it but don't recall reading about tax free exchange except for fractional shares. I'll have to go back and do a search. I'm not exchanging any of my Lilly shares for Elanco.


If you received the 303 page offer, in the "Q & A about the exchange offer" look at page 11 section 32, looks like they are still waiting for an opinion on taxes.

 

[ownyourfuture]

If you received the 303 page offer, in the "Q & A about the exchange offer" look at page 11 section 32, looks like they are still waiting for an opinion on taxes.

I did receive the 303, but only looked at the first couple of pages. Thanks for the info on page 11. I'll check it out when time allows. I suppose I could call Lilly, but it seems like I tried to get a hold of them once in the past & it was a major P-I-T-A.

If I find out anything worthwhile, I'll post it here.

 

[splitwdw]

I own Zoetis so not looking for another animal health stock. Wonder if the institutional investors will be interested in exchanging LLY shares. Think Lilly has 293 million shares it wants to exchange.
I haven't been investing as long as some here and never received an offer like this. Is it normal for a "parent" company to keep as much stock in the spin off company as Lilly did? I don't recall Pfizer keeping stock in Zoetis when it spun it off but maybe I didn't notice because there was no exchange offer made.

 

[njhowie]

I don't recall Pfizer keeping stock in Zoetis when it spun it off but maybe I didn't notice because there was no exchange offer made.

Oh indeed there was - Pfizer shareholders had the same deal offered to them as what Lilly is doing here.

In the time since the spinoff, Pfizer shares are up about 50%, while Zoetis shares are up about 200%.

I would seriously consider taking the exchange, minimally for 50% of the Lilly shares I held. Where will there likely be more growth going forward? I would say in the spinoff.

Pfizer Inc said on Wednesday it will spin off its majority stake in animal health business Zoetis Inc to shareholders by allowing them to swap Pfizer stock for Zoetis shares at a 7 percent discount.

https://www.reuters.com/article/us-...s-stake-to-shareholders-idUSBRE94L0JB20130522

 

[socca]

My question: What does “Lilly expects the exchange offer to be tax free” actually mean? I can't believe that this would mean ‘if’ I chose to participate, the capital gains on the Eli Lilly shares I exchanged, (which are substantial) would be assigned a new cost basis?

I agree. I'm not an expert on U.S. tax matters, but I suspect that what they mean is that the exchange itself will not generate a tax liability for you for the year in which it occurs. Lilly is most likely not claiming that folks who do the exchange will have a stepped-up basis in the new shares (the IRS isn't fond of capital gains suddenly disappearing without associated taxes being paid). Instead, the current basis in Lilly shares exchanged must be transferred to the new shares acquired. If the current custodian of your Lilly shares is tracking the basis (a so-called 'covered security' on IRS Form 1099-B), then the custodian may calculate the basis of your new shares automatically - no work required for you.

I'm not familiar with the companies involved, so I won't comment on whether I think doing the exchange is a good idea. Good luck!

 

[triangle]

Agree with @socca, with the caveat that I have not followed this closely enough to verify that this is a tax free exchange.

A tax free exchange should mean that your old cost basis for the specific X shares of LLY that you elected to convert into Y shares of ELAN would remain intact. That the exchange would not be treated as if you sold X# shares of Lilly and then bought Y# shares of Elanco the same day. That the resulting Y shares would inherit the old cost basis and long term capital gain treatment (if you sold them soon thereafter). Except of course for the fractional share of ELAN that would get sold because of the conversion ratio.

This can get tedious to track, especially for long held shares acquired through numerous transactions. Or shares that had been split or previously acquired through mergers or acquisitions (not sure of the history of Lilly). Regardless I would try to pay attention to which tax lots are used in the conversion or if they are assuming FIFO treatment or something different.

 

[ownyourfuture]

ATTN njhowie: In the time since the spinoff, Pfizer shares are up about 50%, while Zoetis shares are up about 200%.
I would seriously consider taking the exchange, minimally for 50% of the Lilly shares I held. Where will there likely be more growth going forward? I would say in the spinoff.

I realize it's a small timeframe, but since ELAN went public, it's down 18.81% vs a 15.51% gain for LLY.




ATTN socca: I suspect that what they mean is that the exchange itself will not generate a tax liability for you for the year in which it occurs. Lilly is most likely not claiming that folks who do the exchange will have a stepped-up basis in the new shares (the IRS isn't fond of capital gains suddenly disappearing without associated taxes being paid)

That certainly makes sense.


ATTN triangle: A tax free exchange should mean that your old cost basis for the specific X shares of LLY that you elected to convert into Y shares of ELAN would remain intact. That the exchange would not be treated as if you sold X# shares of Lilly and then bought Y# shares of Elanco the same day. That the resulting Y shares would inherit the old cost basis and long term capital gain treatment (if you sold them soon thereafter). Except of course for the fractional share of ELAN that would get sold because of the conversion ratio.

Well stated.

Hopefully I don't regret it, but I've decided not to participate in the exchange offer.
Thanks to all who replied.