A new US law to curb corporate tax avoidance has scuppered a merger between drugmakers Pfizer and Allergan as it foiled Pfizer's attempt to slash its tax bill by redomiciling to Ireland where Allergan is registered.
US drugmaker Pfizer said in a statement Wednesday it had jointly agreed with Irish-based company Allergan to call off a planned merger. It would pay Allergan $150 million (132 million euros) for its expenses as a result of terminating the deal, Pfizer added.
The decision came two days after the US Treasury Department issued new rules to make deals aimed at avoiding paying corporate taxes in the US, also known as tax inversion, less profitable.
The collapse of the acquisition is a major victory for US President Barack Obama who has vowed to fight tax-dodging corporate mergers. "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 on Tuesday.
US President Barack Obama has called global tax avoidance a "huge problem" and urged Congress to take action to stop US companies from implementing corporate "inversions", which lower companies tax bills by redomiciling overseas.
The $160-billion tie-up between the Viagra-maker and Allergan, which produces Botox, would have become the biggest tax inversion ever attempted. Pfizer, which announced the deal in November, said its tax rate would drop to about 17 or 18 percent after relocating to Ireland from around 25 percent in the US. That would have represented more than $1 billion in annual cost savings.
While the new rules did not name Pfizer and Allergan, one of their provisions targeted a specific feature of their merger - Allergan's previous history as a major acquirer of other companies.
Under previous rules which still apply, Allergan shareholders needed to own at least 40 percent of the combined company for the two companies to enjoy the full benefits of lower taxes in Ireland.
But a new 'three-year-look-back rule' issued by Washington on Monday made this much harder for Allergan, and appeared to take aim directly at it because of how the company was put together.
The new rule does not allow stock accumulated through a foreign company's US deals in the last three years to count towards the book value needed to meet the inversion threshold.
This weighed on Allergan heavily because of its significant deals in this timeframe. These include the $66-billion merger of Allergan and Actavis, the $25-billion purchase of Forest Laboratories and the $5-billion takeover of Warner Chilcott.
"The serial acquisition portion of the regulations will cause Pfizer to be treated as an 'expatriated entity' (under the terms of its existing deal with Allergan)," Robert Willens, a corporate tax and accounting analyst, wrote in a note.
In a second change to the rules, the Treasury also said it would seek to limit a practice known as earnings stripping that is often undertaken following, but not limited to, an inversion. The new Treasury rules would restrict related-party debt for US subsidiaries in dealings that do not finance new investment in the United States.
The deal's collapse is also a blow to the investment banks involved. Guggenheim Partners, Goldman Sachs, Centerview Partners Holdings and Moelis & Co stood to share $94 million in fees advising Pfizer had the deal closed. Allergan would have paid its advisors, JPMorgan Chase and Morgan Stanley, $142 million in total, according to the latest estimates by Freeman & Co. Bankers may now get paid only 10 percent of these amounts, according to Freeman.
This is not the first time a tightening of the inversion rules have caused a merger to unravel. US pharmaceutical company AbbVie abandoned its $55-billion takeover of Ireland-domiciled peer Shire after the Obama administration cracked down on inversions in 2014. AbbVie had to pay Shire a $1.6 billion break-up fee.
Besides Pfizer-Allergan, other pending inversion deals that have not yet closed include the proposed $16.5-billion merger of Johnson Controls with Ireland-based Tyco International, Waste Connections' $2.67-billion deal with Canada's Progressive Waste Solutions, and IHS's $13-billion acquisition of London-based Markit.
Waste Connections and Progressive Waste Solutions said they expected the rules would impact less than 3 percent of the combined adjusted free cash flow in their first year after the deal. IHS and Markit said they believed the rules would not affect their adjusted effective tax rate guidance of a low to mid-twenties percentage range.
uhe/cjc (AP, Reuters, dpa)