Pfizer and Allergan would have to pay the other party just $400m if either one were to pull out of their $160bn deal due to a possible change in the law. For such a large transaction, it would be a tiny break-up fee and one that threatens to fuel concerns the combination could fall through.
The termination fee for pulling out of the deal for other reasons would stand between $3bn and $3.5bn, in line with other deals of this size, but the merger agreement allows the companies to walk away for a fraction of that amount “due to an adverse change in the law”.
Analysts and investors said there was nervousness that the largest ever “inversion” deal could fall prey to political interference, because it would allow Pfizer to avoid at least $21bn in future US tax bills by moving the combined group to Ireland, where Allergan is based.
In a note to investors, analysts at Evercore ISI said the $400m break-up fee signalled a “lack in absolute confidence that the US Treasury could not force a change in regulations prior to the close of the transaction that would negatively impact the deal”.
The merger agreement was published as Pfizer kicked off a round of meetings with top shareholders on Tuesday to garner support for the biggest tax inversion in history, as market reaction suggested investors were pricing in a significant chance of the transaction collapsing.
Shares in Dublin-based Allergan were trading at $303 during early New York trading on Tuesday, roughly 19 per cent below Pfizer’s all-stock offer, which was worth about $362 per share — a large discount given that both boards have signed off on the friendly deal.
There was a chorus of opposition from Democrat politicians when the deal was announced on Monday, and from Donald Trump, the Republican presidential nominee, who said “the fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting”.
Pfizer has not said how many jobs will be lost following the merger, but it expects to cut costs by $2bn over three years.
There is also discontent among large Allergan investors, some of whom believe the company is being sold on the cheap and is worth at least $400-a-share or more, prompting concerns that they could oppose the transaction or hold out for a better offer from Pfizer.
Pfizer’s move to delay a decision on whether to break itself into two — with one company focused on branded drugs and another on older medicines — also disappointed some investors, who had hoped the Allergan takeover would hasten a split.
“There some concern around the Federal government trying to block the deal — people are just not reassured,” said Ronny Gal, an analyst at Bernstein. “There is also a secondary concern that investors in Allergan, who are unhappy with the price, will revolt against the deal.”
The long timeline for completing the deal, which will not be consummated until the latter half of next year, is adding to nervousness, according to one sizeable Allergan investor. Pfizer’s decision to ditch its last attempt at an inversion — the £69.4bn takeover of Britain’s AstraZeneca — in the face of political opposition was also a concern, the investor said.
Ian Read, Pfizer’s chief executive, started meeting top investors in both companies on Tuesday, according to people familiar with the situation, to try to soothe nerves and make the case for the strategic benefits of the deal. A Pfizer spokesperson confirmed Mr Read was meeting shareholders.
“In the case of AstraZeneca, the company didn’t have the support of the target’s management or board, or the British government,” said an adviser to Mr Read. “Whereas this time round, the Allergan executives are on board, the Irish government hasn’t opposed it, and the US administration has admitted there is very little they can do.”
Some analysts believe that Pfizer and Allergan purposely underplayed some of the financial benefits of the deal, such as the potential for cost cutting, and refrained from offering details of what are expected to be huge shareholder buybacks, to avoid fuelling political opposition.
Cost savings in excess of the $2bn-over-three-years target outlined on Monday could stoke fears of significant job losses, according to analysts. Meanwhile, using Pfizer’s foreign cash reserves to fund shareholder returns rather than spending on research and development would undermine the company’s claim that the deal will be good for American science.
“We believe Pfizer and Allergan are strongly incentivised to understate potential tax, operating expenditure [savings], and earnings accretion given the heavy political scrutiny underpinning the planned inversion out of the US,” said Andrew Baum, an analyst at Citi.
However, it could be difficult for Pfizer to offer investors more bullish forecasts in private because of Irish takeover rules that require companies to make relevant information publicly available to all shareholders.
A person close to Mr Read said he was prepared for the chorus of political opposition and that he was relaxed about the market reaction.
“You announce a big deal, it doesn’t close for a while, it isn’t accretive in the first year, and it puts off your separation — it’s not a message that’s going to have the stock up 5 per cent,” the person said.
Financial Times
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Rene Ilves
