New York pharmaceuticals giant Pfizer (PFE) confirmed on Wednesday, April 6, that it will scrap its $160 billion merger with Allergan (AGN) after a new clampdown on so-called inversions by the Treasury Department.
The erstwhile merger partners decided that changes announced late on Monday "qualified as an 'adverse tax law change' under the merger agreement" and therefore called off their November pact, Pfizer said.
Pfizer will pay Allergan a $150 million breakup fee on parting.
"Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies," said Pfizer chairman and CEO Ian Read in a statement.
He said the company maintains "the financial strength and flexibility to pursue attractive business development and other shareholder friendly capital allocation opportunities" and would decide whether to separate its early-stage operations from its established business by the end of 2016, as planned before it decided to merge with Allergan.
Allergan shares had closed down 14.8% at $236.55 on the New York Stock Exchange on Tuesday, while Pfizer rose more than 2% at $31.36. Before a flurry of early-hours news reports predicting its retreat, the New York company had also been seen as potentially willing to launch a legal challenge to the tax reforms.
The companies' November agreement had valued Allergan at $363.63 per share, for a total enterprise value of $160 billion, based on a Pfizer closing price of $32.18 on Nov. 20. The renamed Pfizer plc would have taken Allergan's Irish legal domicile.
Healthcare stocks rose in Europe on Wednesday, including the Viagra maker's abortive 2014 bid target AstraZeneca (AZN), which was up 3.5% in London as of mid-morning East Coast time, and GlaxoSmithKline (GSK), the target of unconfirmed bid overtures which will soon wave goodbye to long-term CEO Andrew Witty. GlaxoSmithKline was up almost 2%.
Allergan, for its part, is seen likely to have Dublin-based rare-disease specialist Shire (SHPG) in its sights. Shire stock rose 4.5%.
In its own statement, Allegan insisted that it had a "compelling standalone growth profile and strategy."
"While we are disappointed that the Pfizer transaction will no longer move forward, Allergan is poised to deliver strong, sustainable growth built on a set of powerful attributes," said CEO and president Brent Saunders, who claimed the group's pipeline is "one of the strongest in the industry, loaded with 70 mid-to-late stage programs including 14 expected approvals and 16 regulatory submissions in 2016 alone."
He said the company is "poised to deliver additional growth opportunities from its attractive financial profile and balance sheet," propelled by the $40.5 billion it expects to receive when Teva Pharmaceutical Industries (TEVA), of Israel, closes the purchase of its generics unit.
That deal is expected to close in June.
The Treasury Department's surprise Monday reforms followed two previous attempts to deter U.S. companies from switching domiciles through overseas M&A designed in large part to reduce their tax bills.
The changes would have affected the ownership split of a combined Pfizer/Allergan and meant Pfizer could no longer be classed as the target in the union and therefore avoid the "inversion" definition.
The New York group would have burst through the critical 60% ownership ceiling after the Treasury said it would exclude assets attributable to the relevant foreign merger partner that were acquired within three years of any deal seeking to avoid existing curbs on inversions.
Allergan, as the former Actavis, has been involved in several significant mergers in recent years.
"Pfizer and Allergan were at the cusp of a key ratio taking into consideration a number of smaller deals that put them below the threshold," said one tax lawyer familiar with the situation. "Now the big deal no longer gets them the shares they need to stay below the threshold."
He added that Treasury changes on so-called earnings stripping also contributed to scuttling the deal.
Earnings stripping has allowed a U.S. unit to reduce its tax bill by borrowing funds from its foreign parent and deducting interest payments in the U.S. However, the maneuver has also had other benefits.
"The real benefit prior to this change was that the U.S. subsidiary starts to migrate its operations and revenues out of the U.S. subsidiary into the foreign parent, essentially stripping out the earnings from the U.S. subsidiary to the foreign parent," said the lawyer. "Pfizer still has all the operations it has before and is still a U.S. taxpayer but what got you the benefit is once you invert then you start eroding the U.S. tax base by moving the operations and revenues to the foreign parent. This becomes a problem under the new restrictions."
That change in particular is expected to have a wide impact on other transactions going forward.
Scott Stuart contributed to this report
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