If Pfizer Saves Allergan Deal, These Two Things Should Be Changed

Allergan plc Ordinary Shares AGN were trading down more than 15 percent on Tuesday afternoon, while shares of Pfizer Inc. PFE were up more than 2.5 percent as rumors about a possible cancellation of the deal between both the companies started to circulate the Street.

A Reuters report, citing a source familiar with the issue, said Pfizer "is leaning toward abandoning its $160 billion agreement to buy Allergan Plc in light of the U.S. Treasury's new measures to curb such tax evading deals."

BMO: More Uncertainty, But Not Over

Alex Arfaei of BMO Capital Markets said that Allergan's market cap that would be used to compute the percentage foreign ownership of PFE + AGN will not be enough to exceed the 60/40 inversion threshold, and may not even be enough to reach the 80/20 threshold.

"If the Treasury's actions also apply to Actavis' acquisition of Warner Chilcott in 2013, then inversion is out of the picture for Pfizer," Arfaei wrote in a note to clients.

Arfaei believes that the tax benefits of the PFE+AGN merger will likely be significantly diminished based on the Treasury's recent actions.

"If Pfizer is not able to invert and repatriate its ex-U.S. cash in a tax efficient manner to repurchase a significant portion of the 4.7Bn new shares it will be issuing to buy AGN, then we doubt that the current deal structure, and implied valuation for AGN, would make sense for PFE shareholders," Arfaei noted.

Two Changes: Structure, Stock Calculation Could Be Revised

"If Pfizer still chooses to pursue Allergan for other strategic reasons, e.g. to setup a split, our initial view is that the deal structure needs to be significantly revised," he added.

The analyst is also wondering if the stock calculation proposal can withstand legal challenge given that it is targeting historical corporate actions at what appears to be an arbitrary cut-off point of three years.

"Clearly, these actions seem to have been targeted to block the PFE/AGN merger. While it is difficult to predict whether the new proposals will become formal regulations, the uncertainty associated with this merger is now significantly higher," Arfaei noted.

With or without AGN, Arfaei said he is maintaining his Outperform rating on PFE, with a price target of $39.

Shares of Allergan closed Tuesday's regular trading session down 14.85 percent at $236.55, while Pfizer closed 2.08 percent higher at $31.36.