Daily Management Review

Pfizer-Allergan deal could be derailed by New U.S. Inversion Rules


04/05/2016




Pfizer-Allergan deal could be derailed by New U.S. Inversion Rules
With the pending $160 billion merger of Pfizer Inc and Allergan Plc seen as a potential casualty, the U.S. Treasury Department took new steps on Monday to curb tax-avoiding corporate "inversions".
 
In what is termed as the largest inversion deal ever, there has been sharp political criticism of Pfizer's and Allergan's merger and the changes come less than a year before President Barack Obama ends his term. While one of the provisions of the rules takes aim directly at the deal, the rules themselves did not single out this deal.
 
They were reviewing the Treasury Department's notice, the companies said.
 
"Prior to completing any review, we won't speculate on any potential impact,” the companies said in a joint statement.
 
In recent years there has been severe criticism of the moves by some US companies who have sought to slash their tax bills by redomiciling overseas while their core operations and management usually remain in the United States while the company enjoys the lowered tax benefits of a new tax home. The federal government has been grappling with this wave of inversions in recent years. the issue has also featured in the presidential campaigns of several U.S. presidential candidates including Republican Donald Trump and Democrat Hillary Clinton.
 
Despite the repeated calls to the Republican-controlled U.S. Congress by Obama, a Democrat, to take action on inversions very little has been done. Obama welcomed the Treasury's action while repeating his appeal to Congress on Monday.

A three-year limit on foreign companies bulking up on U.S. assets to avoid ownership limits for a later inversion deal will be imposed, the Treasury said in a statement.
 
"In simple words, Allergan's key deals in the prior 36 months won't be counted (as far as meeting the inversion threshold is concerned) when doing the ownership math for the Pfizer-Allergan deal," Evercore analyst Umer Raffat wrote in a note.
 
The $25 billion purchase of Forest Laboratories, the $66 billion merger of Allergan Plc and Actavis Plc and the $5 billion takeover of Warner Chilcott would be included in the limitation.
 
"The real issue is not so much what Allergan may prove or disprove, or whether Treasury overstepped its authority. The real question is whether Pfizer reads today's regulations as reason enough to not continue to pursue the deal," Raffat wrote.
 
In case of an adverse change in U.S. law would cause the combined company to be treated as a U.S. domestic corporation for federal income tax purposes,  either party may terminate the deal under the agreement between Pfizer and Allergan. According to the merger agreement, the terminating party would have to pay the other company up to $400 million for its expenses.
 
A practice known as earnings stripping that is often undertaken following an inversion would also be tackled through another rule to be proposed by the Treasury.
 
(Source:www.reuters.com) 






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