New Inversion Rules Force Pfizer to End Deal With Allergan
06 Aprile 2016 - 1:50PM
Dow Jones News
Pfizer Inc. said Wednesday it would walk away from its planned
$150 billion takeover of Allergan PLC, after the Obama
administration took aim at the deal that would have moved the
biggest drug company in the U.S. to Ireland to lower its taxes.
The Wall Street Journal reported Tuesday that Pfizer's board had
voted to halt the combination and the New York-based pharmaceutical
company then notified Dublin-based Allergan.
Pfizer will pay Allergan a breakup fee of $150 million.
The decision to walk away is the latest setback in Pfizer's
long-running efforts to overcome what Chief Executive Ian Read has
said was the company's competitive disadvantage with foreign rivals
that faced significantly lower tax bills.
In 2014, Pfizer had tried but failed to buy British drugmaker
AstraZeneca PLC. Afterward, it looked for a new partner, before
finally reaching terms with Allergan.
By combining with Ireland-based Allergan, Pfizer could not only
cut its tax rate but also get access to the billions of dollars in
revenue it was keeping overseas to avoid paying U.S. taxes on top
of the taxes it had already paid in foreign countries.
The combination also had nontax benefits for Pfizer, including
access to Allergan's portfolio of strongly growing products like
antiwrinkle treatment Botox, dry-eye treatment Restasis and new
irritable-bowel drug Linzess.
A combination also might have paved the way for Pfizer to shed
its collection of cash-generating but older slower-growth
drugs.
Tax-inversion deals have become commonplace in U.S. corporate
deal-making. They have also become a talking point in the U.S.
presidential campaign, with certain candidates attacking the
uprooting of American companies and departure of tax receipts.
The tie-up between Pfizer and Allergan, the biggest merger
announced last year—the busiest ever for takeovers—was a particular
campaign target. Republican and Democratic presidential candidates
have criticized the deal.
President Barack Obama on Tuesday called corporate inversions,
in which a U.S. company buys a foreign rival and adopts its
lower-tax jurisdiction, one of the "most insidious tax loopholes
out there." Companies that have inverted frequently make more
acquisitions of U.S. companies to bring them on to their lower-tax
platforms.
The problem, Mr. Obama said, isn't that companies are engaging
in illegal activity, but what is legal in the first place.
The government had so far been unable to do much to stop
corporate inversions, but that clearly changed with Monday's
publication of a third installment of proposed rule changes, the
stringency of which came as a surprise to many.
In an effort to crack down on what the Treasury Department calls
"serial inverters," the new regulations would disregard three
years' worth of U.S. acquisitions when determining a foreign
company's size under the tax code.
That complicated the finely tuned math that was crucial for
inversions like Pfizer's to work. To reap maximum benefits,
shareholders of the inverting company should own between 50% and
60% of the combined entity. Between 60% and 80% also works, but the
tax perks are diminished, and above 80%, they are lost entirely. So
U.S. companies need inversion partners that are at least
one-quarter their size, and ideally more like two-thirds.
When the Allergan deal was struck last year, Pfizer's market
capitalization was about $200 billion and Allergan's was about $120
billion. Pfizer's shareholders would own 56% of the combined
company.
But stripping out three years' worth of deals done by
Allergan—which Treasury certainly would consider a serial
inverter—that math no longer works. Allergan has 395 million shares
outstanding.
It has issued about 260 million shares for big deals, including
the $25 billion takeover of Forest Laboratories and the $66 billion
combination of Actavis and Allergan last year.
Stripping those out leaves about 130 million shares, worth only
about $30 billion. Under the current merger ratio, Allergan
shareholders' stake in the combined company would likely drop into
the high teens.
In other words, in the eyes of Treasury, Allergan would have
been too small to be Pfizer's inversion partner.
Allergan shares fell 15% Tuesday, a sign that many investors
considered the deal to be dead. Pfizer shares rose 2.1%.
The White House denied the new rules were targeted at a specific
company.
"The Treasury Department is not focused on a specific
transaction, it's focused on specific loopholes," White House press
secretary Josh Earnest said. The White House declined to address
the specific Pfizer and Allergan situation, but Mr. Earnest said
the administration would be "pleased" if inversion deals fell
through.
Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com, Liz
Hoffman at liz.hoffman@wsj.com and Richard Rubin at
richard.rubin@wsj.com
(END) Dow Jones Newswires
April 06, 2016 07:35 ET (11:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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