S&P Places Pfizer (PFE) on Watch for Downgrade Following Move to Acquire Allergan (AGN)

Standard & Poor's Ratings Services placed its 'AA' corporate credit and senior unsecured long-term debt ratings on Pfizer Inc. (NYSE: PFE) on CreditWatch with negative implications. The short-term and commercial paper ratings remain at 'A-1+'.

Pfizer's proposed roughly $160 billion acquisition of specialty pharmaceutical company Allergan PLC further strengthens Pfizer's already excellent competitive position in the high-margin pharmaceutical industry, adding a number of strong products and pipeline prospects to the company's portfolio.

The company will initially fund the acquisition with equity. "However, we expect that subsequent to the close of the acquisition Pfizer would then embark on a share repurchase program to lower dilution," said Standard & Poor's credit analyst Arthur Wong. While share repurchases will likely be funded with ongoing free cash flows and on-hand cash and investments, net debt leverage at Pfizer may increase over the next several years, as we net Pfizer cash and investments to arrive at net debt leverage. Depending on the size and pace of the share repurchases, the deterioration in credit measures could put pressure on the 'AA' ratings. Standard & Poor's estimates---with the projected combined cash and cash flows of Pfizer and Allergan, with some assumed synergies--that share repurchases upward of $80 billion to $85 billion over a three-year period are within the capacity of the current rating, absent any major operational setbacks and debt-financed acquisitions.

We will resolve the CreditWatch placement when there is more clarity to Pfizer's future financial policy, considering that the company's cash and investments overseas will clearly be more accessible following the acquisition of Allergan. In the event that share repurchases exceed the $80 billion to $85 billion range referred to above, downgrade potential is limited to one notch.

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