Allergan-Pfizer Merger Gives Pharma a Growth Injection

The $160 billion all-stock deal is the largest-ever tax inversion and pharmaceutical sector merger.


< Deals of the Year 2015: Six Transactions that Made a Big ImpactWhat peddles Botox, pumps out Viagra and saves a bundle on taxes? The new Pfizer, which in late November inked the richest pharmaceuticals tie-up ever by agreeing to purchase peer Allergan in a $160 billion all-stock deal. The pending merger — also the biggest tax inversion so far — will create the world’s fourth-largest corporation by market capitalization, at some $350 billion.

New York–based Pfizer agreed to pay $363.63 a share for Allergan, a 30 percent premium on Allergan’s stock price as of October 28. In return, it will gain an Irish tax domicile: Allergan has dual headquarters in the New York suburb of Parsippany–Troy Hills, New Jersey, and in Dublin, where the merged business will be based under the Pfizer name.

Taxes are a potential stumbling block for the deal, which is expected to close by the fall of 2016. By moving to Ireland, Pfizer would see its corporate rate fall from about 25 percent to below 20 percent, according to investment bank and advisory firm Evercore ISI. But in the U.S. tax inversions have grown politically unpalatable. President Barack Obama has called them “unpatriotic,” and the Department of the Treasury has brought in rules intended to curb such transactions, the latest of which it unveiled in November.

Pfizer-Allergan is probably safe for now, though. Allergan will own about 43 percent of the business, so the deal skirts the Treasury’s 60 percent threshold for ownership of a new, foreign company by its old U.S. parent.

Pfizer chair and CEO Ian Read, who will head the combined enterprise, has tried to shift attention away from the inversion debate. “This deal is not just about tax benefits,” Read, 62, asserted in late November on CNBC’s Squawk on the Street. “This deal is about great franchises.”

Both pharma heavyweights in their own right, Allergan and Pfizer aren’t exactly cut from the same cloth. Research and development powerhouse Pfizer is home to such name brands as cholesterol drug Lipitor, antidepressant Zoloft and Viagra, the infamous blue pill for erectile dysfunction. As for Allergan, just a year ago it was Actavis, an acquisitive specialist in off-patent drugs that chief executive Brenton Saunders described as “having that generic DNA” in an early-2015 interview with Institutional Investor. Saunders gave the company some brand-name cachet by buying Allergan, maker of cosmeceuticals Botox and Latisse, for $66 billion in March 2015. The combined company kept the Allergan name and Irish tax status; Saunders kept the CEO post. In his latest deal he is expected to be president and chief operating officer of Pfizer.

That July, Allergan sold its generics business to Israel’s Teva Pharmaceuticals for $40.5 billion to pay off debts incurred from its 18-month spree of takeovers. That leaves Allergan to focus on its bevy of name brands, which complement Pfizer’s top sellers and R&D pipeline.

After a dip in the wake of the deal announcement, Pfizer’s and Allergan’s stocks edged back upward, to roughly $33 and $315, respectively, as of early December. Once the transaction closes, Allergan investors will receive 11.3 shares in the new company for each existing share. For Pfizer shareholders, it’ll be a one-to-one trade.

“Given the nature of the deal, there’s probably potential for a very large share buyback,” says Aaron (Ronny) Gal, specialty pharmaceuticals analyst at Sanford C. Bernstein & Co. in New York. “In our model, stock at the combined company will reach $3 earnings per share in 2018.”

The merger will also produce major dividends for the banks involved. JPMorgan Chase & Co. and Morgan Stanley stand to split between $160 million and $200 million in fees for advising Allergan, according to data provider Freeman & Co. For their work on behalf of Pfizer, Centerview Partners, Goldman Sachs Group, Guggenheim Securities and Moelis & Co. will take in between $120 million and $150 million. — Anne Szustek

Follow Anne Szustek’s blog and on Twitter at @the59thStBridge.

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