New US rules stymie Pfizer-Allergan inversion

PFIZER had decided to terminate its $160 bn merger with Allergan, a person familiar with the matter said, marking an end to the largest yet health care acquisition as officials in Washington crack down on corporate inversions.

Pfizer would need to pay a $400m fee to Allergan for expenses relating to the deal, the person said, asking not to be identified as the information is private.

Allergan, which is run from New Jersey, but has a legal domicile in Dublin, agreed last year to merge with Pfizer in a deal that would have given the New York-based company a foreign address and a lower tax rate.

The decision represents a victory for President Barack Obama, whose administration on Monday proposed tougher-than-expected new rules aimed at making inversions like the Pfizer-Allergan deal harder to achieve. In an inversion, a US company shifts its tax address overseas. In the Pfizer-Allergan deal, the new company would have been located in Ireland.

The treasury department said on Monday that new rules would limit companies’ ability to participate in inversion transactions if they had already done them within the past 36 months. Allergan has been involved in several such acquisitions in that time frame.

Representatives for Pfizer and Allergan declined to comment.

Before April 4, Allergan “was a great fit”, Bloomberg Intelligence analyst Asthika Goonewardene said. But, the new policies would have stretched the combined entity’s ability to garner the favourable Irish tax rate, he said.

Pfizer had been examining how it might be able to challenge the new rules, people with knowledge of the matter said earlier. From the moment it was announced last November, the Pfizer-Allergan transaction drew criticism from US public officials and from both Democratic and Republican presidential candidates. Mr Obama on Tuesday told reporters that inversions make “hardworking Americans feel like the deck is stacked against them”. Since the first inversion in 1982, 53 US companies have shifted their tax addresses offshore — 22 of them since 2012.

Pfizer has said it has strategic reasons for pursuing the acquisition, although it would also help the company escape the US’s 35% tax rate, which applies to profits made anywhere in the world.

Ever since a tax law change in 2004, the main way US companies have been able to claim a foreign address has been to buy a smaller company abroad and adopt its domicile. The law requires the foreign company to be at least one-fourth the size of the US one.

Monday’s proposed rule tightens that restriction by saying if a foreign firm has bulked up through mergers with other US companies in the past three years, as Allergan has, that additional bulk is not counted towards its size. Treasury officials have said they were not targeting any particular taxpayers with the new rule.

CNBC reported earlier that the two companies would mutually end their planned merger, without naming its sources.

Buying Allergan would have given Pfizer medications to add to its specialty drug unit.

In 2014, Pfizer abandoned its effort to buy AstraZeneca after its UK competitor rejected its offer.

Allergan’s shares slumped 15% to $236.55 in New York on Tuesday on concerns about the effect of the new rules. Pfizer closed 2.1% higher at $31.36.

Bloomberg

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