Coverage: Pfizer, Allergan combine in megamerger

Pfizer announced Monday that it would purchase Botox maker Allergan in a $160 billion deal, but the deal is sure to draw many critical eyes given it is an inversion deal.

Inversion deals allow U.S. corporations to switch their headquarters to foreign countries where taxes are less restrictive. President Obama has been a vocal critic of such transactions, calling them “unpatriotic.”

Fred Imbert of CNBC had details on the megamerger:

Pfizer announced Monday it will buy Allergan for $363.63 a share, or about $160 billion.

The deal represents a premium of of over 30 percent based on the companies’ unaffected shares price as of Oct. 28, Pfizer and Allergan said in a joint release.

“Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry,” Pfizer Chief Executive Ian Read said.

Allergan shareholders will receive 11.3 shares of the combined company — Pfizer plc — per Allergan share, while Pfizer’s will receive one stock for every Pfizer share they own.

The deal, the largest ever in the health care sector, is expected to close in second half of nest year.

Ben Hirschler of Reuters explained how this deal will push health care mergers up to $600 billion in 2015:

Pfizer Inc’s looming deal to buy Botox maker Allergan Plc for more than $150 billion will cap a record-breaking run for mergers and acquisitions in the healthcare sector, taking the cumulative value of deals in 2015 to more than $600 billion.

Helped by cheap finance, healthcare has seen an unprecedented wave of M&A activity since the start of 2014, stretching from large drugmakers buying up smaller rivals to consolidation among makers of generic medicines and tie-ups between insurers.

Pfizer’s tax-driven takeover of Allergan, which people familiar with the matter said won board approval on Sunday, will vault healthcare into the top slot for deal-making by sector, ahead of both energy and technology.

Thomson Reuters data shows healthcare M&A at the end of last week had already reached $460.2 billion, eclipsing the full-year record of $392.4 billion set in 2014. Energy and power M&A stood at $572.4 billion and high technology on $514.4 billion.

The Pfizer-Allergan deal is the largest ever in the healthcare sector, beating the previous record set in 1999 when Pfizer agreed to buy Warner-Lambert for $90 billion to gain control of cholesterol fighter Lipitor.

Jonathan D. Rockoff and Dana Mattioli of The Wall Street Journal explained how the inversion deal would work:

Pfizer Inc. and Allergan PLC said Monday that they would merge, a so-called inversion deal of about $155 billion that would create the world’s biggest drug maker by sales.

The takeover would be the largest so-called inversion ever, moving one of the top names in corporate America to a foreign country. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate elsewhere, and have remained popular in the face of U.S. efforts to curb them.

To help secure that lower tax rate, the deal will be technically structured as a reverse merger, with Dublin-based Allergan, which is smaller, buying New York-based Pfizer. The companies on Monday said the businesses of Pfizer and Allergan will be combined under Allergan, which will be renamed Pfizer PLC and trade under the ticker symbol PFE, Pfizer’s current symbol, on the New York Stock Exchange.

Under terms of the deal, the companies will exchange 11.3 Pfizer shares for every Allergan share, and the deal also contains a cash component between $6 billion and $12 billion.

The deal is structured as a reverse merger, with smaller, Dublin-based Allergan buying New York-based Pfizer, which will help secure a lower tax rate.

Chad Bray of The New York Times laid out the tax benefits of this type of inversion deal:

The Allergan deal came after Pfizer, one of the oldest drug makers in the United States, tried unsuccessfully last year to shift its home base abroad.

The company sought a $119 billion takeover of AstraZeneca of Britain, but it abandoned its pursuit after AstraZeneca repeatedly rejected its approaches and the campaign drew the ire of lawmakers in the United States and Britain.

By acquiring Allergan, Pfizer would not only save on its overall tax rate, but it would also be better able to use earnings from its international operations for additional acquisitions or other activities.

Under current rules, Pfizer must pay American corporate taxes on the billions of dollars in earnings from international operations if it ever tries to bring the money back to the United States, restricting its ability to use that money for certain corporate functions. (The company kept $74 billion in earnings offshore last year to avoid that bill.)

Last year, Pfizer’s tax rate was about 26.5 percent, and it is expected to be about 25 percent this year. By comparison, Allergan reported a tax rate of just 4.8 percent for 2014 and is expected to have a tax rate this year of about 15 percent.