New Treasury Action Could Block, or Significantly Change Pfizer (PFE)/Allergan (AGN) Deal - BMO Capital
BMO Capital analyst Alex Arfaei weighed in on Pfizer (NYSE: PFE) after the U.S. Treasury and the IRS issued temporary and proposed regulations to further reduce the benefits of and limit the number of corporate tax inversions.
"We believe that the most relevant proposal for the PFE + AGN merger is the action to 'limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies.'," the analyst said. "For the purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion under current law, today’s action excludes 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."
"Allergan is the product of multiple recent acquisitions in the U.S., including the acquisition of Forest Labs, which closed on July 1, 2014 for $31Bn (equity consideration of $20.6Bn, $7.1Bn cash, and $3.3Bn in assumed debt)," Arfaei notes. "Similarly, on March 17, 2015, Actavis acquired Allergan for $77Bn: $40Bn cash, $35Bn equity consideration, and $2Bn assumed debt. Immediately prior to the Forest lab deal closing, Actavis’ market cap was about $39Bn. Based on our initial understanding of the Treasury’s recent proposals, Allergan’s market cap that would be used to compute the percentage foreign ownership of PFE + AGN will not be enough to exceed the 60/40 inversion threshold, and may not even be enough to reach the 80/20 threshold. If the Treasury’s actions also apply to Actavis’ acquisition of Warner Chilcott in 2013, then inversion is out of the picture for Pfizer."
He added, "Under current law, an inverted company is subject to potential adverse tax consequences if the shareholders of the former U.S. parent (in this case current PFE shareholders) end up owning at least 60% of the shares of the new foreign parent. Therefore, we believe that the tax benefits of the PFE+AGN merger will likely be significantly diminished based on the Treasury’s recent actions. If Pfizer is not able to invert and repatriate its ex-U.S. cash in a tax efficient manner to repurchase a significant portion of the 4.7Bn new shares it will be issuing to buy AGN, then we doubt that the current deal structure, and implied valuation for AGN, would make sense for PFE shareholders. If Pfizer still chooses to pursue Allergan for other strategic reasons, e.g. to setup a split, our initial view is that the deal structure needs to be significantly revised."
The firm maintained an Outperform rating and price target of $39 on PFE with or without AGN.
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Shares of Pfizer closed at $30.72 yesterday.