Leerink: Treasury Notice Lowers Pfizer-Allergan Deal Chances, Ownership Test Changes A 'Surprise'

The US Treasury’s latest move reduced the benefits of a deal between Pfizer Inc. PFE and Allergan plc Ordinary Shares AGN, while limiting the number of corporate tax inversions.

Leerink’s Jason M. Gerberry noted that Pfizer’s break-up fee is now significantly lower, given the adverse changes in tax law, and the Notice “lowers the probability of the deal closing.”

Key Aspects To Consider

Analyst Jason Gerberry mentioned the key considerations regarding the Treasury update:

• The Notice proposes a change in the "ownership test," which is used to determine Allergan’s ownership of the new entity formed by the merger, from more than 40 percent to mid-20 percent. This could fall below 20 percent, depending on certain assumptions. This suggests the risk of Pfizer owning more than 80 percent of the new entity and the deal not being considered as an inversion.
• The Notice includes a provision regarding EPS stripping, “which we don’t see as a deal killer,” Gerberry wrote.
• Although there are some legal questions regarding the implementation of the Notice, the reduction in breakup fee from $3.5B to $400m could provide Pfizer with “sufficient reason to walk away.”

Recommendations

Leerink maintained a Market Perform rating for Pfizer. Reiterating an Outperform rating for Allergen, Gerberry recommended buying the shares “in any event [whether or not the deal gets completed] if the shares remain at pre-market levels (~$220/shr as of this writing).”