I wrote this article regarding the Allergan (NYSE:AGN)/Pfizer (NYSE:PFE) tie-up yesterday stating that these new obstacles the Treasury Department laid out were very well telegraphed from back in November. The increased rumors of a Pfizer/Allergan marriage were increasing leading up to this news back in November, and it was agitating law-makers across the country until the Treasury Department stepped in and did something about it.
Many people left comments yesterday stating that these new inversion rules came as a surprise to investors. Yes, maybe the specifics were a surprise, but the fact that something was put out by the Treasury Department shouldn't have been. In what may have been the biggest tax inversion ever, it is almost safe to say that the Treasury Department was targeting to block this Allergan/Pfizer deal in specific. The move done by the Treasury Department yesterday was the quickest way that Washington could have gotten something done short of passing actual legislation.
These new rules are tailored specifically for this Pfizer/Allergan deal because it says specifically that the previous three years must be looked at which includes two inversion deals Allergan made which can't be accretive to this deal. This would obsolete the actual Actavis/Allergan deal and the Forest Labs/Actavis deal, making current Allergan too small for Pfizer to swallow for an inversion deal. If that isn't overreaching, then I don't know what is.
News came out during the day today stating that Pfizer is mulling the idea of cancelling the deal because the inversion benefits can no longer be realized. By my calculations, the inversion itself was worth roughly $27B. From Allergan's peak in November of about $320 to the current $236 share price, the stock has lost nearly $32.8B in market cap which far exceeds the amount of what the inversion was worth to Pfizer. In my opinion, the stock should be due for a bounce back on that news alone.
Theoretically, Pfizer can still pursue Allergan on a fundamental basis, after all, the companies are synergistic from a product portfolio perspective. Of the sixteen different therapeutic areas that Pfizer services, only six overlap with that of Allergan's eight therapeutic areas. Of the six overlapping therapeutic areas, only two products are directly overlapping. But in reality, Pfizer was only pursuing this deal from a tax perspective, predicated on the fact that the company tried to acquire AstraZeneca (NYSE:AZN) four times the previous year. The final nail in the coffin just came through, the companies will announce in the morning that they will cancel the deal.
I'm almost certain that Allergan was a hedge fund hotel where lots of people parked their money because of the almost 15% premium that was left on the deal till closing. And now that the deal is over, the hedge fund guys exited quickly, causing the stock to crater almost 15% the day after the new rules were announced. The investor base has to now turn over the hedge fund guys for the fundamental investor. And any fundamental investor would know that Allergan is a great company to begin with as it is now trading at 13.7x next year's earnings estimates.
I'm certainly not selling the name, and in fact I added an additional 20% position today. I will only make my purchases on event-driven news and the next time I plan on making a purchase is upon closing of the sale of Allergan's generics business to Teva (NASDAQ:TEVA). I still believe in the Botox platform and Allergan's ability to thrive on a standalone basis.
Pfizer and Allergan were playing by the book that was handed to them from the government with regards to domiciling in a different country, and now these new rules have been levied. It doesn't matter that these new rules were levied because they are just new rules to play by. Maybe Allergan and Pfizer weren't able to consummate this marriage but different companies will most certainly find a way around it. Who knows, maybe Pfizer comes back to Allergan in three years' time and makes the purchase after the three year look back rule has passed?
The ability for Pfizer to lower its tax base was going to allow the company to (not in any particular order):
1. Deliver more dividends to its stakeholders
2. Distribute more money for R&D purposes
3. Be more competitive against its global drug manufacturing comrades
This may be a "victory" for the Obama administration but definitely a loss for the American people. President Obama described it as an insidious tax loophole but in reality these two companies were playing by the book. The only thing "Anti-American" about this whole deal is the fact that our corporate tax rates are just too high, causing companies to look elsewhere to do business. Both sides of The House agree that there needs to be corporate tax reform but no action is taking place. Now analysts have to begin analyzing both companies on a standalone basis again, and I will begin to do so with Allergan in due time.
Disclosure: I am/we are long AGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.