Obama's inversion curbs kill Pfizer's $160-B Allergan deal

NEW YORK - U.S. drug maker Pfizer Inc agreed on Tuesday to terminate its $160 billion agreement to acquire Botox maker Allergan Plc, in a major victory to U.S. President Barack Obama's drive to stop tax-dodging corporate mergers.

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 U.S. 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 U.S. 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.

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 U.S. 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 $400 million 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 2 percent on hopes the company would walk away or renegotiate the deal in its favor. Allergan shares closed down 14.8 percent to their lowest level since October 2014.

Several U.S. 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.

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

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 3 percent 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.

THREE-YEAR RULE

Under previous rules which still apply, Allergan shareholders needed to own at least 40 percent of the combined company for the two companies to enjoy the full tax benefits of an inversion, and more than 20 percent 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 U.S. 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 $66 billion merger of Allergan and Actavis Plc, the $25 billion purchase of Forest Laboratories and the $5 billion 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.

SHEDDING GENERICS

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 U.S. 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 U.S. drugmakers Biogen Inc, Regeneron Pharmaceuticals Inc and AbbVie Inc, 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 18 percent after the deal, from around 25 percent. That would have represented more than $1 billion in annual cost savings.

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

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

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

source: www.abs-cbnnews.com

Pfizer set to buy Allergan for more than $150 billion - sources

Pfizer Inc. secured formal board approval on Sunday for its acquisition of Botox maker Allergan Plc for more than $150 billion (99 billion pounds), a deal that will create the world's biggest drug maker, according to people familiar with the matter.

The deal, the largest ever in the healthcare sector, will be announced on Monday and is sure to draw political ire in a U.S. presidential election year because Pfizer would redomicile to Ireland, where Allergan is registered, in a so-called "inversion" that would slash its corporate tax rate.

It will also reignite debate in the pharmaceutical industry over the role of research and development, with Allergan Chief Executive Brent Saunders, a prolific dealmaker and a skeptic of in-house drug discovery, joining the combined company in a position to influence its strategy.

The deal would involve Pfizer paying with 11.3 of its shares for each Allergan share, the people said. There will also be a small cash component, accounting for less than 10 percent of the value of the deal, the people said.

Pfizer's Chief Executive Ian Read, 62, will be CEO of the combined company, with Allergan's CEO Brent Saunders, 45, serving in a very senior role focused on operations and the integration, the people added.

Saunders will also have a seat on the combined company's board, one of the people said.

The sources asked not to be identified because the terms of the deal are not yet public. Pfizer and Allergan declined to comment.

COLOSSUS

The deal would create a pharmaceutical colossus with annual sales of more than $60 billion, putting the merged group well ahead of No. 2 U.S. drugmaker Merck & Co (MRK.N), which has annual sales of about $40 billion.

Widely used Pfizer drugs such as Lipitor, Viagra and nerve pain treatment Lyrica would be brought together with Allergan's Namenda memory loss treatment, Restasis dry eye medication and other leading eye-care brands.

It would be the biggest merger of the year, topping beer maker Anheuser-Busch InBev's (ABI.BR) proposed $107 billion takeover of SABMiller Plc (SAB.L). And it would realize Read's longtime ambition of an inversion deal that would get Pfizer out from under the 35 percent U.S. corporate tax rate, among the world's highest. The tax rate in Ireland is 12.5 percent.

Pfizer’s talks with Allergan come more than a year after the U.S. firm abandoned a bid to acquire AstraZeneca (AZN.L) and move its tax headquarters to Britain.

The U.S. Treasury last year, and again last week, updated its rules on inversions to make it harder for companies to avoid U.S. taxes by moving overseas. But experts have said these moves would do little to prevent Pfizer from inverting.

Although Pfizer has decried the high U.S. corporate tax rate, it has minimized its U.S. taxes for years by selling its drug patents to overseas subsidiaries and then using them to make drugs that are sold back to U.S. affiliates. While generating big profit margins for its overseas arm, the practice has allowed Pfizer to report losses on its higher-taxed U.S. business in each of the past five years.

Many industry analysts and investors believe Pfizer could be bulking up with Allergan's fast-growing brands as a prelude to splitting by 2017 into two companies - one selling high-margin branded drugs and one selling inexpensive generics that have dragged down Pfizer results over the past few years.

Read, a trained accountant, has said Pfizer could decide on such a split by late 2016, after it completes separate financial analyses of the two businesses.

Pfizer's $15 billion purchase earlier this year of hospital products maker Hospira, which sells generic injectable drugs and is developing biosimilar versions of top-selling biotech medicines, was widely seen as a move to make its generics business more attractive ahead of a sale.

Allergan has agreed to sell its own wide array of generics by early next year to Israeli drugmaker Teva Pharmaceutical Industries Ltd (TEVA.TA) for $40.5 billion.

Speculation has been rife on Wall Street whether Read or Saunders would take the helm of the combined company, and whether Saunders would be content to play second fiddle to Read, who became Pfizer CEO in 2010 after more than 30 years with the company.

Saunders has had a meteoric rise in the industry over the past five years, turning around eye-care company Bausch & Lomb and also leading Forest Laboratories and Swiss drugmaker Actavis, which took the Allergan name after acquiring it this year.

Earlier, he won plaudits for helping Schering-Plough overcome serious quality-control problems and then leading its integration with Merck & Co.

Due to his rapid ascent and moves, Saunders has not presided over start-to-finish development of a drug, a process that can take 12 years or longer.

And unlike large drugmakers who conduct costly discovery research, Saunders has said that it makes more sense economically to acquire medicines that have already shown promise in human trials.

But in a recent interview, Saunders said he would be willing to put a higher emphasis on drug discovery if it makes sense for his company.

Pfizer shares closed little changed on Friday at $32.18, while Allergan's rose 3.4 percent to $312.46, both on the New York Stock Exchange.

source: www.abs-cbnnews.com