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Wednesday 26 October 2016

Pfizer pulls out of €140bn Irish Allergan merger

Published 06/04/2016 | 07:41

Ian Read, chairman and chief executive officer of Pfizer Inc., left, and Brent Saunders, president and chief executive officer of Allergan Plc, stand for a photograph in front of Pfizer headquarters in New York, U.S., on Monday, Nov. 23, 2015. Pfizer Inc.
Ian Read, chairman and chief executive officer of Pfizer Inc., left, and Brent Saunders, president and chief executive officer of Allergan Plc, stand for a photograph in front of Pfizer headquarters in New York, U.S., on Monday, Nov. 23, 2015. Pfizer Inc.

US drug maker Pfizer agreed on Tuesday to terminate its $160bn (€140bn) agreement to acquire Botox maker Allergan, in a major victory to US President Barack Obama's drive to stop tax-dodging corporate mergers.

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The decision to end the biggest tax "inversion" ever attempted, which would have seen Pfizer slash its tax bill by redomiciling to Ireland where Allergan is registered, came a day after the US Treasury unveiled new rules to curb inversions.

While these new rules did not name Pfizer and Allergan, one of their provisions targeted a specific feature of their merger; Allergan's previous history as a major acquirer of other companies. The subsequent demise of the deal allows Obama to claim a big win during his last year in office.

Earlier on Tuesday, Obama called global tax avoidance a "huge problem" and urged Congress to take action to stop US companies from tax-avoiding corporate "inversions", which lower companies tax bills by redomiciling overseas.

"While the Treasury Department's actions will make it more difficult... to exploit this particular corporate inversions loophole, only Congress can close it for good," Obama said.

Read more: Pfizer deal in doubt as Obama blasts US firms' Irish tax moves

Pfizer and Allergan will announce the termination of their deal on Wednesday, a source familiar with the matter said, asking not to be identified ahead of any official statement. Pfizer and Allergan declined to comment.

Pfizer was concerned that any tweaks to salvage the inversion might have provoked new rules by the US Treasury, and so was leaning earlier on Tuesday to end the deal, a source had earlier told Reuters.

Pfizer will have to pay Allergan up to $400m for its expenses as a result of terminating the deal, according to their merger agreement.

Pfizer shares had ended trading in New York on Tuesday up 2pc on hopes the company would walk away or renegotiate the deal in its favour. Allergan shares closed down 14.8pc to their lowest level since October 2014.

Several US presidential candidates, including Republican Donald Trump and Democrats Hillary Clinton and Bernie Sanders, have seized on the issue in their campaigns.

"We have so many companies leaving, it is disgraceful," Trump told reporters as he greeted voters in Waukesha, Wisconsin on Tuesday. Clinton and Sanders both expressed support for Treasury's plan.

Read more: Pfizer won't speculate on US Treasury's inversion move after agreeing Irish Allergan deal

Besides Pfizer-Allergan, other pending inversion deals that have not yet closed include the proposed $16.5bn merger of Johnson Controls with Ireland-based Tyco International, Waste Connections' $2.67bn deal with Canada's Progressive Waste Solutions, and IHS' $13bn acquisition of London-based Markit.

In all these cases, the shares of the target companies fell only slightly. Johnson Controls and Tyco said they would respond after conducting a review of the new rules.

Waste Connections and Progressive Waste Solutions said they expected the rules would impact less than 3pc of the combined adjusted free cash flow in their first year after the deal.

IHS and Markit said they believed the rules would not affect their adjusted effective tax rate guidance of a low to mid-twenties percentage range.


Under previous rules which still apply, Allergan shareholders needed to own at least 40pc of the combined company for the two companies to enjoy the full tax benefits of an inversion, and more than 20pc to have any inversion benefit at all.

But a new 'three-year-look-back rule' issued by the Treasury on Monday made this much harder for Allergan, and appeared to take aim directly at it because of how the company was put together.

The new rule does not allow stock accumulated through a foreign company's US deals in the last three years to count towards the book value needed to meet the inversion threshold.

This weighed on Allergan heavily because of its significant deals in this timeframe. These include the $66bn merger of Allergan and Actavis Plc, the $25bn purchase of Forest Laboratories and the $5bn takeover of Warner Chilcott.

"The serial acquisition portion of the regulations will cause Pfizer to be treated as an 'expatriated entity' (under the terms of its existing deal with Allergan)," Robert Willens, a corporate tax and accounting analyst, wrote in a note.


In a second change to the rules, the Treasury also said it would seek to limit a practice known as earnings stripping that is often undertaken following, but not limited to, an inversion. The new Treasury rules would restrict related-party debt for US subsidiaries in dealings that do not finance new investment in the United States.

Without Allergan's new, fast-growing medicines, Pfizer may need to look for other companies with attractive products, such as US drugmakers Biogen, Regeneron Pharmaceuticals and AbbVie, said Raghuram Selvaraju, managing director of brokerage H.C. Wainwright.

Pfizer had planned to make a decision by 2016 whether to split off its hundreds of generic medicines, but delayed the decision until 2019 after announcing its merger with Allergan. Morningstar analyst Damien Conover had said the decision could be moved to late 2017 or 2018 if the deal with Allergan collapsed.

Pfizer, which announced the deal in November, had said its tax rate would drop to about 17 or 18pc after the deal, from around 25pc. That would have represented more than $1bn in annual cost savings.

The deal's collapse is also a blow to the investment banks involved. Guggenheim Partners LLC, Goldman Sachs Group, Centerview Partners Holdings LLC and Moelis & Co stood to share $94m in fees advising Pfizer had the deal closed, while Allergan would have paid its advisors, JPMorgan Chase & Co and Morgan Stanley, $142m in total, according to the latest estimates by Freeman & Co LLC.

Bankers may now get paid only 10pc of these amounts, according to Freeman.

This is not the first time a tightening of the US inversion rules have caused a merger to unravel. US pharmaceutical company AbbVie abandoned its $55bn takeover of Ireland-domiciled peer Shire after the Obama administration cracked down on inversions in 2014. AbbVie had to pay Shire a $1.6bn break-up fee.


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