Pfizer and Allergan to Combine With Joint Value of $160 Billion

Allergan Shares Recoil in Wake $160 Billion Pfizer Deal
  • Price is 27% premium to Allergan shares before talks public
  • Read to be CEO, Saunders to be president of new Pfizer Plc

Pfizer Inc. and Allergan Plc agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from Viagra to Botox and a low-cost tax base.

QuickTake Tax Inversion

Pfizer will exchange 11.3 shares for each Allergan share, valuing the smaller drugmaker at $363.63 a share, according to a statement Monday. That’s a premium of about 27 percent above Allergan’s stock price on Oct. 28, before news of the companies’ discussions became public. Pfizer investors will be able to opt for cash instead of stock in the combined company in exchange for their shares, with as much as $12 billion to be paid out.

The transaction is structured so that Dublin-based Allergan is technically buying its much larger partner, a move that makes it easier for the company to locate its tax address in Ireland for tax purposes, though the drugmaker’s operational headquarters will be in New York. Pfizer Chief Executive Officer Ian Read will be chairman and CEO of the new company, with Allergan CEO Brent Saunders as president and chief operating officer, overseeing sales, manufacturing and strategy.

The deal will begin adding to Pfizer’s adjusted earnings starting in 2018 and will boost profit by 10 percent the following year, the companies said. Pfizer’s 11 board members will join four from Allergan, including Saunders and Executive Chairman Paul Bisaro. 

Pfizer said it will start a $5 billion accelerated share buyback program in the first half of 2016. The deal is expected to be completed by the end of next year. The combined company will trade on the New York Stock Exchange.

Pfizer dropped 2.6 percent to $31.33 at the close in New York, while Allergan fell 3.4 percent to $301.72.

At those prices, Allergan is trading 17 percent lower than the offer price. That discount is based on the risk of the deal falling through during a fraught political time and an election season, Kevin Kirstein, an analyst at Evercore ISI, said on a video sent to clients. The time the deal may take to complete also increases its riskiness, Kirstein said.

Unprecedented Deal

Pfizer, based in New York, makes medications including Viagra, pain drug Lyrica and the Prevnar pneumococcal vaccine, and Allergan produces Botox and the Alzheimer’s drug Namenda. Together, barring any divestitures, the companies will be the biggest pharmaceutical company by annual sales, with about $60 billion.

The deal will be unprecedented on many levels. It’s the largest acquisition so far this year. It’s the largest ever in the pharmaceutical world, eclipsing Pfizer’s purchase of Warner-Lambert Co. in 2000 for $116 billion. And if the new company is able to establish itself abroad for a lower tax rate, a controversial process called an inversion, it will be the largest such move in history.

The U.S. Treasury Department has increasingly targeted such strategies, most recently announcing new guidance on how it will value assets owned by U.S. companies that undertake inversions. The U.S. has the highest tax rate for businesses in the world, at 35 percent, and is one of the only countries to tax corporate profits wherever they are earned. Previous moves by the U.S. Treasury have derailed other proposed inversions, including AbbVie Inc.’s plan to buy Ireland’s Shire Plc for an estimated $52 billion.

Read said in an interview that the merger team reviewed the new Treasury rules when they were released last week and decided to proceed with the transaction as the companies had agreed to structure it previously.

Read has already reached out to lawmakers in both houses of Congress, including Senate Majority Leader Mitch McConnell, and is calling the White House Monday, according to a person with knowledge of the matter. His pitch is that that the deal will help the companies invest in more innovative drugs and that Pfizer Plc would have 40,000 U.S. employees at the close of the transaction.

The $160 billion transaction would make Pfizer the biggest company in Ireland, which has a $200 billion economy.

Facilitate Split

An agreement may also facilitate the widely discussed potential for Pfizer to reconfigure itself by splitting the newly enlarged company into two: one focused on new drug development, the other on selling older medications. Pfizer said Monday it will decide on a potential separation by the end of 2018.

Read initiated talks by calling Saunders earlier this fall. "It was a very strong case and I agreed with it," Saunders said in an interview Monday. Most of the dealmaking took place in October, he said.

The talk led to a series of conversations, including a meeting during a Business Council gathering in Colorado, that culminated in a handshake Oct. 28. Since then, the companies and their bankers have been hammering out the terms of the transaction.

"Deals occur because you have the true value there, you have the industrial logic, you need the culture to work and the people to make it work," Read said.

Pfizer earlier this year bought Hospira Inc., the maker of generic drugs often administered in hospitals, in a transaction valued at about $17 billion. The deal bolstered Pfizer’s established-drugs business, which combines strong cash flow and slow growth.

Allergan itself has been recently transformed, created through an acquisition by Actavis Plc that kept the Allergan name. The company agreed to sell its generics business to Israel’s Teva Pharmaceutical Industries Ltd. for about $40.5 billion and has been on a buying binge of its own. It now has more than 70 compounds in mid-to late-stage development.

If the transaction gets regulatory approval, it will be a vindication for Pfizer CEO Read. A 62-year-old who was born in Scotland, he has been open about his pursuit of a lower tax rate even after a foiled attempt to acquire London-based AstraZeneca Plc last year.

Read, who has led Pfizer for almost five years, has said the U.S. corporate tax rate makes it tougher for American companies to compete. Presidential candidates including Donald Trump have called for changes in corporate tax rates to keep U.S. companies from moving. Carl Icahn, the billionaire investor known for picking fights with corporate executives, has said he will put $150 million into a new super-PAC that would push politicians for changes to the way U.S. corporations are taxed on their earnings abroad.

For Saunders, 45, the merger is the culmination of a rapid-fire series of multibillion-dollar deals that took him from obscurity to become one of the industry’s most powerful people. Saunders had joined Actavis after it acquired Forest Laboratories Inc. in 2014.

Next CEO?

In a prominent position at the combined company, Saunders would be a favorite to succeed Read eventually.

“Honestly, I go into one of these deals, big or small, not focused on my future but on trying to build the best future for the company,” Saunders said in an interview last month. “Once that’s set, I look at what I can do and how I can add value.”

Saunders’s holdings in and previous equity awards from Allergan would be valued at $176 million, based on the deal’s $363.63 a share offer price.

Guggenheim Securities, Goldman Sachs Group Inc., Centerview Partners and Moelis & Co. were Pfizer’s financial advisers, with Wachtell, Lipton, Rosen & Katz; Skadden, Arps, Slate, Meagher & Flom LLP and A & L Goodbody providing legal counsel.

JPMorgan Chase & Co. and Morgan Stanley were Allergan’s financial advisers, while Cleary Gottlieb Steen & Hamilton LLP, Latham & Watkins LLP and Arthur Cox were legal advisers.

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