New US inversion rules could wreck Pfizer-Allergan deal
- The U.S. Treasury on Monday unveiled new restrictions on corporate tax inversions which could potentially undermine the $160 billion merger between Pfizer and Allergan. Under the terms of the merger, Pfizer plans to relocate the headquarters of the combined company to Allergan's home base of Ireland, effectively lower its corporate tax rate.
- In essence, the stricter rules would make it more difficult for the companies to meet the ownership limits governing Pfizer's ability to shift its tax domicile abroad.
- Both companies said they were reviewing the new actions but wouldn't speculate on what impact they might have.
The tie-up between Pfizer and Allergan would create the world's largest drugmaker and be one of the largest mergers in industry history. Although Pfizer is the larger company and would own a greater share of the combined company, Allergan technically is buying Pfizer in a what is known as a reverse merger.
While U.S. and E.U. regulators are still examining the deal, it had appeared set to go through despite criticism from lawmakers and presidential candidates in the U.S. But the new, stricter rules from the Treasury Department case some doubt on whether the merger can still proceed.
The Treasury will now disregard assets acquired in prior deals with American companies for the purposes of calculating ownership percentages. This will apply to deals in the three years preceding the signing of the latest acquisition. By doing this, the Treasury is making it more difficult to duck under the 60% ownership restriction on inversions.
Pfizer had structured its deal with Allergan to own 56% of the resulting combined company. Now, a number of acquisitions made by Allergan before its agreement with Pfizer will not count towards Allergan's stock ownership—potentially pushing Pfizer's share above 60% and diminishing the economic benefits of the merger.
"Some companies are serial inverters. They acquire multiple U.S. firms in stock-based transactions over a short period of time. This increases their size and reduces the negative tax consequences of a subsequent inversion. Today’s action takes away a significant amount of the tax benefits of these serial inversions," said Treasury Secretary Jack Lew in prepared remarks.
Lew also urged Congress to pass specific legislation to combat inversions, saying only new laws would be able to stop these types of transactions from happening entirely.
In remarks Tuesday afternoon, President Obama echoed Lew's calls for Congress to pass legislation addressing inversions. "These new actions by the Treasury build on steps we have taken to make the system fairer. But I want to be clear...only Congress can close [this loophole] for good," Obama said.
In morning trading on Monday, Allergan stock fell by over 15% while Pfizer stock increased minimally.
Pfizer has not indicated whether the new rules would make a merger less attractive.
"We are conducting a review of the U.S. Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact," the companies said in a joint statement.
If the merger is called off, Pfizer will owe Allergan $400 million under the original terms, a smaller break fee than AbbVie's $1.6 billion payment to Shire after their merger attempt fell through, EP Vantage reports.
This post has been updated.
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