November 20, 2015
By Mark Terry, BioSpace.com Breaking News Staff
Yesterday’s announcement by the U.S. Treasury Department of rules changes to make tax inversions more difficult, might stop the pending Pfizer Inc. -Allergan, Inc. deal, but insiders are indicating it may be structured differently to avoid those changes. Predominantly, there is speculation that instead of Pfizer acquiring Allergan, the deal will be structured in such a way that Allergan actually is acquiring Pfizer, which would essentially make an end-run around some of the political repercussions.
Definitive changes to the U.S. tax code regarding tax inversions would require an act of Congress. Yesterday the Treasury Department announced guidance that would make it harder for U.S. companies to invert and also cut the tax benefits. These were on top of some measures taken in September 2014.
Although it’s unclear if the changes in guidance would actually prevent or delay the Pfizer-Allergan merger, a number of sources are suggesting that the deal will be structured in a way to circumvent the new changes. A big part of that structuring, according to inside sources reported by Reuters, is a 2-3 percent break-up fee with Allergan Plc .
The breakup fee would be paid to Allergan by Pfizer if Pfizer decided to abandon the deal. Most reports have indicated the deal would be for about $150 billion, so the fee could run from $3 billion to $4.5 billion. Break-up fees, according to Reuters, are based on the target company’s size and a fee of this size, although one of the largest ever, would not be out of proportion given the companies’ values, and could potentially be higher.
The largest break-up fee recorded to date was $10 billion between Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD). The largest ever paid, however, was for $4 billion, when AT&T’s attempt to buy T-Mobile US Inc (TMUS) was shot down by regulators in 2011.
The upshot of the deal being structured in this way is that, at least for appearance’s sake, Allergan would seem to be acquiring Pfizer, rather than the other way around. Either way, Pfizer would shift its domicile to Ireland, and the merged companies would benefit from Ireland’s lower corporate tax rate.
“An Allergan acquisition of Pfizer may make more sense,” Vamil Divan, an analyst with Credit Suisse suggested earlier this month in a research note. “One way to avoid (or minimize) political backlash around Pfizer trying to do an inversion could be for the companies to structure the deal as Allergan buying Pfizer…. Should Allergan buy Pfizer for $45 per share (~35 percent premium to yesterday’s close) it would be more than 20 percent accretive in year one, based on a similar deal structure to what we looked at for Pfizer buying Allergan.”
Analysts have projected that if the deal would bring Pfizer’s tax rate to 15 percent, then there would be about a $2.1 billion savings by 2017. That’s a lot of money, even though Pfizer would essentially be paying a $35 billion premium for Allergan. JP Morgan, according to BidnessEtc predicts annual costs savings of about $2 billion for Pfizer.
Hannah Ishmael, writing for BidnessEtc, says, “After taxing these at the lower tax rate, applying the 10X multiple and a 10 percent discount, they become worth up to $15 billion. Hence, if everything works out smoothly for Pfizer, the combined savings from the deal will be about the same as the premium it might be offering.”
She goes on to point out that Pfizer has anywhere from 70 to 90 percent of its cash tied up in overseas accounts and that “bringing it home” would bring on big tax expenditures. Shifting its domicile to Ireland gives it cheaper access to its own money.
There are also synergy benefits, of course. Allergan has a number of strong new products, such as Botox and Restasis. It recently sold off its generics units to Israel-based Teva Pharmaceutical Industries Ltd. for $40.5 billion. There has been speculation that if the deal comes together, it will only be a year or two before the mega-company splits into two, one that focuses on faster-growing research-and-development-focused products, and the other that focuses on its older, mature, often off-patent drugs.
A deal is expected to be announced next week.
