Moody's Sees Lower Cash Levels for Pfizer (PFE) as Shareholder Payouts Increase Amid Allergan (AGN) Deal

Pfizer's (NYSE: PFE) acquisition of Allergan (NYSE: AGN) will improve the company's scale, diversity and research pipeline, but will also increase shareholder payouts, lowering the company's cash levels over time, says Moody's Investors Service.

The merger will greatly increase Pfizer's scale, creating a global pharmaceutical powerhouse whose product diversity will be exceeded by only a handful of global pharmaceutical companies.

"This merger will give Pfizer a strong presence in dermatology, gastroenterology, ophthalmology and aesthetics," said Michael Levesque, a Moody's Senior Vice President. "It will strengthen Pfizer's research pipeline and decrease the company's exposure to upcoming patent expirations."

The tax benefits of the merger are also significant. The structure of the deal will significantly lower Pfizer's tax rate and improve its access to existing and future cash flows, according to the report "Pfizer Inc.: Allergan Brings Business and Tax Benefits, but Buybacks Will Rise."

The combined entity will have over $60 billion in cash at close. However, the primary beneficiaries of Pfizer's increased access to global cash are likely to be shareholders, who will receive high payouts from share repurchases over time, resulting in declining cash.

"We consider this a clear credit negative because it reduces a valuable source of liquidity available for unexpected operating setbacks," added Levesque. "It will also reduce the cash that could be used for future acquisitions, which would otherwise be credit positive by expanding earnings or enhancing Pfizer's pipeline."

Moody's notes that the potential split of Pfizer's pharmaceutical business remains, which would have negative implications for the company's credit profile. However, the Allergan acquisition likely pushes out the point at which Pfizer would split.

Moody's affirmed Pfizer's A1 rating and stable outlook following the deal's announcement.

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