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U.S. Treasury rules put Pfizer-Allergan deal in question

NEW YORK (Reuters) – The U.S. Treasury Department’s proposed new tax regulations threw a series of corporate mergers into question on Tuesday, fanning a hot political situation and pushing Pfizer Inc closer to a decision to walk away from buying Botox maker Allergan Plc.

Pfizer is leaning towards abandoning its $160 billion agreement to buy Allergan in light of the U.S. Treasury’s new measures to curb tax-evading deals, a source familiar with the situation said on Tuesday.

Pfizer is not willing to change the terms of its deal with Allergan which, under the new tax rules, would no longer benefit from the move to Ireland, the source said.

U.S. President Obama on Tuesday called global tax avoidance a “huge problem” and urged Congress to take action to stop U.S. companies from tax-avoiding corporate “inversions”, which lower companies tax bills by redomiciling overseas.

“While the Treasury Department’s actions will make it more difficult … to exploit this particular corporate inversions loophole, only Congress can close it for good,” Obama said.

Besides Pfizer-Allergan, deals that could be affected by the new rules include the proposed $16.5 billion merger of Johnson Controls Inc with Ireland-based Tyco International Plc

Johnson Controls said it is reviewing the regulations. Tyco did not immediately reply to a request comment.

Waste Connections Inc and Canada’s Progressive Waste Solutions Ltd said on Tuesday they will go ahead with their $2.67 billion deal. Both companies’ shares fell.

ALLERGAN SHARES PLUNGE

The largest among the affected deals is Pfizer’s plan to buy Dublin-based Allergan, move its headquarters to Ireland, and lower its tax rate.

Allergan shares were down 15.4 percent at $234.94 in the busiest trading day in company history. Pfizer shares rose 2 percent to $31.33.

Discussions between the two companies and their lawyers are set to continue Tuesday and no final decision has been made, the source said, speaking on condition of anonymity.

Pfizer, which announced the deal in November, has said its tax rate would drop to about 17 or 18 percent after the deal, from around 25 percent. That would represent more than $1 billion in annual cost savings.

On Monday night, Pfizer and Allergan said in a joint statement that they were reviewing the notice and declined to speculate on whether the deal would go forward.

Allergan’s bonds sold off in heavy trading on expectations the deal would fall through and that Allergan would not get the credit ratings lift that market players had expected by its merger with Pfizer.

Trading activity in Allergan and Pfizer options surged to several times normal.

Shares of M&A advisory firms, meanwhile, tumbled in response to the new U.S. inversion rules. The S&P 600 Investment Banking & Brokerage Index lost 2.9 percent, M&A advisor Evercore Partners fell 4.7 percent, while Greenhill & Co was down 4.5 percent.

HOT POLITICAL ISSUE

The federal government has grappled with a wave of inversions in recent years as U.S. companies seek to slash their tax bills by redomiciling overseas, although their core operations and management usually remain in the United States even as they claim a new tax home.

Late on Monday, the Treasury Department introduced a regulation that would negate the benefits of inversions.

Treasury said it will impose a three-year limit on foreign companies bulking up on U.S. assets to avoid ownership limits for a later inversion deal. Allergan’s key deals in the prior 36 months include the $66 billion merger with Actavis Plc and the $25 billion purchase of Forest Laboratories.

Several U.S. presidential candidates, including Republican Donald Trump and Democrat Hillary Clinton, have seized on the issue in their campaigns.

“We have so many companies leaving, it is disgraceful,” Trump told reporters as he greeted voters in Waukesha, Wisconsin.

Clinton and Senator Bernie Sanders both expressed support for Treasury’s plan.

NEXT STEPS?

If Pfizer does not acquire Allergan’s new, fast-growing medicines, Pfizer will need to look for other companies with attractive products, such as U.S. drugmakers Biogen Inc , Regeneron Pharmaceuticals Inc and AbbVie Inc , said Raghuram Selvaraju, managing director of brokerage H.C. Wainwright.

Morningstar analyst Damien Conover said if the deal collapses, Pfizer will likely move up its decision on a key business strategy – whether to sell or spin off its hundreds of generic medicines.

Pfizer had planned to make a decision by 2016 whether to split off its generics, but delayed the decision until 2019 after announcing its merger with Allergan. Conover said the decision could be moved to late 2017 or 2018.

Jeff Jonas, a portfolio manager at Gabelli funds which owns Allergan shares, said Allergan stock was falling as merger-related investors sold out, but that Allergan as a standalone company is attractive.

“They’ve been very successful as an acquirer over the years, making smart deals, not overpaying for them, integrating them well and making them work. They just get back to that,” Jonas said. He said he thinks Allergan is worth about $250 per share.

(Additional reporting by Bill Berkrot, Steve Holland, Mike Stone, Natalie Harrison, Meredith Davis in Chicago, Lindsay Dunsmuir and Amanda Becker)

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