Wall Street Breakfast: Inversion Curbs To Kill Pfizer-Allergan Deal

by: Wall Street Breakfast
Wall Street Breakfast
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Pfizer and Allergan will mutually terminate their mega merger this morning, sources told CNBC, after changes in U.S. tax codes dealt a death blow to the largest-ever heath sector deal. New regulations issued Monday by the Treasury Department targeted so-called inversions, under which a U.S. company moves its base to a country with a more favorable taxation environment. Pfizer (NYSE:PFE) will pay Allergan (NYSE:AGN) a $400M breakup fee as part of the agreement. PFE +1%; AGN -2.5% premarket.


Later today the FOMC will issue the minutes from its last meeting, where the Fed left rates unchanged and lowered its forecast for hikes this year from four to two. While traders are hoping the context will help clarify the outlook for rates, central bank watchers are less optimistic. The minutes will also follow a tough day on Wall Street, where the S&P briefly turned negative for the year and the Dow logged triple digit losses.

Texas Senator Ted Cruz and Vermont Senator Bernie Sanders scored big victories in Wisconsin on Tuesday, taking a swipe at front-runners Donald Trump and Hillary Clinton, and extending an increasingly bitter nomination fight. Although the Dairy State only offers a handful of delegates - 42 total for Republicans and 86 tied directly to the Democratic primary - the contests play a pivotal role in candidates' momentum ahead of the important New York primaries later this month.

San Francisco has become the first U.S. city to mandate six weeks of fully paid parental leave (in companies with 20 or more workers), requiring employers to shoulder much of the cost and exceeding federal and state rules for private-sector employees. Better benefits for parents are part of campaigns across the nation aimed at combating rising income inequality. California's governor on Monday signed into law a bill raising the state's minimum wage from $10 to $15 an hour by the year 2023.

Puerto Rico's financial crisis is escalating. The island has taken steps toward a unilateral moratorium on all government debt payments, a sudden move that surprised both Washington and Wall Street. The House Natural Resources Committee, which has been drafting a plan to rescue the U.S. territory, said it still intends to issue an updated version today, despite Puerto Rico's actions.

Activity in China's services sector came in above expectations in March, fueling hopes of a soft landing for the world's second-largest economy. Caixin/Markit's China services PMI last month rose to 52.2, compared to February's reading of 51.2. Combined with the disappointing manufacturing activity announced last week, the numbers took the Composite PMI into positive territory again at 51.3, marking the "strongest expansion of overall business activity" in China in 11 months.

South Korea has determined that Pyongyang is capable of mounting a nuclear warhead on its medium-range Rodong missile, which could strike targets in Russia, China, Japan and the Korean Peninsula. The government's assessment, shared in a background briefing with foreign news media representatives in Seoul, followed a claim by ruler Kim Jong-un in March that his country had miniaturized nuclear warheads enough to mount on ballistic missiles.

The "Panama Papers" have claimed their first casualty: Iceland's Prime Minister. A day after declaring he wouldn't do so, David Gunnlaugsson said he would resign after the leak revealed his wife's ownership of a shell company set up in the British Virgin Islands. Icelandic government bonds saw their biggest selloff in five months due to the uncertainty, with yields on 10-year bonds jumping 15.6 basis points to 5.891%.

Oil prices are rallying on hopes that both OPEC and non-OPEC members will agree to an output freeze at upcoming talks in Doha on April 17. Fresh comments from Kuwait and Russia suggest that global producers could reach a supply agreement deal despite conflicting statements by participants Saudi Arabia and Iran. Crude is also getting a boost from API industry data that showed U.S. crude inventories falling by 4.3M barrels last week. Oil futures +3% to $36.98/bbl.


A big change for investors is set to come down the pipe today, when the Department of Labor unveils the final version of its long-awaited fiduciary rule, requiring financial professionals to put their customers' interests ahead of their own. Whether it all works out for the little guy remains to be seen, but one thing is sure: Regulatory costs will be on the rise, something larger shops - think Merrill Lynch (NYSE:BAC) and Morgan Stanley (NYSE:MS) - are going to be able to absorb better than smaller players who are more reliant on commissions - think LPL Financial (NASDAQ:LPLA) and Raymond James (NYSE:RJF).

Canada's largest pension fund has agreed to pay $2.5B for a 40% stake in Glencore's (OTCPK:GLCNF) agriculture unit as the commodity trader advances its plan to sell assets to curb its debt burden. Glencore also has an option to sell as much as 20% more in the business, and both the company and CPPIB can call for an IPO after eight years from the deal closing, expected to be in the second half of 2016.

BP will be able to deduct a big chunk of its $20B Gulf of Mexico oil spill settlement for tax purposes, accounting experts told the WSJ. Under U.S. law, companies are not allowed to deduct penalties they pay as part of a settlement, but only $5.5B of the $20B cost of the settlement is a fine. BP can classify the remainder as "ordinary business expenses," which are deductible.

The U.S. Justice Department is about to file a lawsuit to stop Halliburton (NYSE:HAL) from acquiring smaller rival Baker Hughes (NYSE:BHI), claiming it violates antitrust laws by eliminating competition between the firms. Analysts at Evercore ISI say BHI shares could fall into the low $30s if the deal breaks apart, citing employee turnover, the cannibalization of its equipment, and general disorder that would cause revenue growth and margin improvement to lag its peers when the upcycle resumes.

Forget Apple vs. the FBI, WhatsApp just switched on encryption for over a billion people. Every conversation on the messaging service, whether it be a private or group chat, will now have full end-to-end encryption, thus making the recipient the only person who can see the message. WhatsApp was bought by Facebook (NASDAQ:FB) for a staggering $19B in 2014.

It has been confirmed that Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are in talks with Germany's premium carmakers about taking minority stakes in their HERE digital mapping service. BMW (BAMXY), Daimler (OTCPK:DDAIY) and Audi (OTCPK:AUDVF) agreed last year to pay €2.5B ($2.8B) for the Nokia (NYSE:NOK) business to build a platform for self-driving cars connected to the Internet. "We need a cloud provider to handle the huge amounts of data created by HERE and its users," said Thomas Weber, a Daimler board member.

A bitcoin revival? Britain's Financial Conduct Authority has granted an electronic money license to Circle, a firm that uses the virtual currency to enable P2P payments using a mobile app, or what the business calls "social payments." The authorization makes it possible for Circle to establish a banking relationship with Barclays (NYSE:BCS), marking the first time a large global bank has agreed to work directly with a Bitcoin (COIN, OTCQB:BTCS) company.

In a letter sent to shareholders, Amazon's (AMZN) Jeff Bezos defended the online retailer's corporate culture, which was subject to a critical report by the NYT last August. "We never claim that our approach is the right one - just that it's ours - and over the last two decades, we've collected a large group of like-minded people...who find our approach energizing and meaningful." In Kindle news: Sources are saying that Amazon's upcoming device will feature a rechargeable protective case for extended battery life. The company is also developing a solar-charged Kindle case.

Shares of Lumber Liquidators rose 11% on Tuesday, following a favorable ruling in a civil case that accused it of violating a California state law. In a preliminary decision, Judge George C. Hernandez Jr. found that Global Community Monitor and Sunshine Park hadn't met their burden of proof, after alleging that Lumber Liquidators (NYSE:LL) failed to warn consumers about certain products which emit formaldehyde above state limits.

Air France-KLM CEO Alexandre de Juniac is stepping down, ending his three-year struggle to push through restructuring measures amid fierce union resistance. He is set to take over as director-general of the International Air Transport Association, the main trade body for the aviation industry. In 2015, Air France-KLM (OTC:AFRAF) delivered its first net profit in eight years, though the figure was largely a result of a sharp drop in fuel prices.

The chairman of the U.S. House Transportation and Infrastructure Committee has come out against Canadian Pacific's (NYSE:CP) proposed railroad merger with Norfolk Southern (NYSE:NSC), dealing another blow to the likelihood of a deal. Bill Shuster noted that CP Rail had actively pursued some sort of merger in the U.S. since 2014, which he said "has done nothing but create uncertainty in the rail industry."

Following a record 20.5% drop last year, Bill Ackman's Pershing Square has blocked off one hour this morning for him to explain exactly how one of its funds lost 25% in the first three months of 2016, including bets on Platform Specialty Products (NYSE:PAH), Herbalife (NYSE:HLF) and Valeant Pharmaceuticals (NYSE:VRX). Despite the losses, Ackman's investors appear to be sticking with him. Redemption requests for the first quarter totaled roughly 2% of the firm's roughly $12B in assets.

Tuesday's Key Earnings

Cree (NASDAQ:CREE) -18.9% following a big preliminary FQ3 miss.
Darden Restaurants (NYSE:DRI) -3.7% after its chairman resigned from the board.
Walgreens (NASDAQ:WBA) -3.4% as sales fell short of expectations.

Today's Markets

In Asia, Japan -0.1% to 15715. Hong Kong +0.2% to 20207. China -0.1% to 2051. India +0.1% to 24900.
In Europe, at midday, London +0.4%. Paris -0.1%. Frankfurt -0.5%.
Futures at 6:20, Dow +0.2%. S&P +0.2%. Nasdaq +0.3%. Crude +3% to $36.98. Gold -0.2% to $1226.80.
Ten-year Treasury Yield +2 to 1.74%

Today's Economic Calendar

7:00 MBA Mortgage Applications
8:30 Gallup U.S. Job Creation Index
10:30 EIA Petroleum Inventories
12:20 PM Fed's Mester: Economic outlook and Monetary policy
2:00 PM FOMC minutes

Companies reporting earnings today