Allergen (AGN) Trading Below Standalone Value Following New Treasury Action - RBC
RBC Capital analyst Randall Stanicky weighed in on Allergen (NYSE: AGN) after Treasury issued aggressive new inversion regulations and proposed earnings stripping.
Stanicky said the main focus is on the regulation aimed at targeting companies that avoid section 7874 by acquiring companies over a short period of time (in this case three years) so that foreign stock related to purchases of American companies would be excluded from the ownership calculation when determining how deals would be treated for deals. He said earnings stripping is less of a surprise and has been discussed for some time.
The analyst notes for the PFE/AGN deal, the AGN holders would own 44% of Newco (i.e., above the 20–40% inversion level).
He commented, "However, this action for the purpose of calculating ownership would "exclude stock of the foreign company attributable to assets acquired from an American company within three years prior to the signing date of the latest acquisition." In other words, if we remove the ACT/AGN, ACT/FRX, and ACT/WCRX (closed 10/1/13) deals for calculation purposes, then AGN may be below the 20% threshold to invert. If proforma ownership remains in the 20–40% range, then PFE can likely achieve limited inversion benefits. While our previous tax expert discussions had touched on the potential for a "temporal proximity" rule (link), probability was thought to be low, and we view the three-year time frame as aggressive and likely targeting this transaction."
Stanicky said there are several unanswered questions, and PFE and AGN are "conducting a review" of the announced action. "First, in after-market with AGN -22% to ~$217, the implied spread is ~$140 per share. In other words, the stock is reflecting deal break. Two questions we are looking for better clarity on: (i) Assuming AGN is below the 20% inversion threshold, can anything be done to get it back up from a deal structure perspective and would that still make sense for PFE? (ii) Is there legal recourse against Treasury's action and are PFE/AGN willing to pursue it?"
The analyst said TEVA's purchase of AGN's generics business should have no impact here and they still expect it to close by June.
The analyst thinks AGN is at a discount to standalone value after-market. "On our $9.4 billion 2017E EBITDA forecast (in line with AGN filing projection, 2% below consensus), if we assume AGN can drive standalone cost savings of 300bps next year (SG&A guidance had moved from 21–24% of revenue to 25% upon postponed restructuring after PFE was announced) and that the TEVA cash proceeds are deployed toward debt pay-down and $5 billion in share repurchases, we get to $20+ in EPS with no assumed capital deployment beyond that (i.e., TEVA stock received or 2017E FCF generated). That implies a P/E of 10.9x 2017E with net debt to EBITDA well below peers at 1.8x (reflecting TEVA equity value) for what remains a best-in-class specialty play. An assumed PRGO peer P/E of ~12.2x (similar historical growth, greater PRGO leverage) would peg AGN at ~$240 on a $20 EPS number."
The firm has an Outperform rating and price target of $354 on AGN.
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Shares of Allergen closed at $277.55 yesterday.