Obama’s anti-inversion rules scupper Pfizer-Allergan deal

US drugs giant and Dublin firm to call off proposed merger over curbs to stop tax deals

A company logo is seen at a Pfizer office in Dublin. Photograph: Cathal McNaughton/Reuters

A company logo is seen at a Pfizer office in Dublin. Photograph: Cathal McNaughton/Reuters

 

US drug giant Pfizer has called off its planned $160 billion takeover of Dublin-based Allergan that would have led to its relocation to Ireland after the US government cracked down on cross-border tax-saving deals.

Pfizer said the decision was driven by new US Treasury rules aimed at such deals, called inversions whereby US companies move overseas in tax-avoiding paper-based mergers.

The merger would have allowed New York-based Pfizer to cut its tax bill by an estimated $1 billion annually by domiciling in Ireland, where tax rates are significantly lower.

While the new Treasury rules did not name Pfizer and Allergan, one of the provisions targeted a specific feature of their merger - Allergan’s history as a major acquirer of other companies.

Allergan chief executive Brent Saunders said on CNBC television that the new Treasury rule would not stop the company from doing other stock-based acquisitions as soon as this fall. The new Treasury rule takes into account the past three years of a company’s deals. “It really looked like they did a very find job at constructing a temporary rule to stop this deal and obviously it was successful,” Mr Saunders said.

Speaking to reporters about his administration’s latest curbs to limit inversions, US president Barack Obama called the transactions “one of the most insidious loopholes out there” and urged Congress to overhaul US tax laws and end the practice of inversion once and for all.

The decision to terminate what would have been the biggest corporate inversion so far came a day after the Obama administration unveiled further curbs on inversions, the third set of restrictions in 19 months.

Pfizer will pay Allergan $150 million to reimburse expenses from its deal.

Shares of Allergan, which fell 15 per cent on Tuesday, were up 1.3 per cent at $239.86 in early trading. Pfizer edged up 1.2 per cent to $31.74.

The merger agreement says that Pfizer will have to pay Allergan up to $400 million in expenses if the proposed deal is terminated.

The rules were aimed at “serial inverters” - foreign companies that have expanded in recent years through multiple inversion transactions.

Allergan is the creation of four merged firms grown through inversions over the past three years: the 2013 acquisition of Irish drug maker Warner Chilcott (formerly Galen) by New Jersey-based Actavis, the 2014 acquisition of US firm Forest Laboratories by Dublin-based Actavis and the takeover of California-based firm Allergan in 2015 by Actavis.

The Treasury’s latest restriction setting a three-year limit on foreign companies bulking up on US assets to avoid ownership rules for future inversions would have excluded these deals from the Pfizer transaction.

The rules also limited the opportunity for earnings stripping that allow inverting companies to stuff US subsidiaries with the debt of the enlarged merged entity that would have reduced taxable American profits.

Republicans and Democrats agree that inversions are a problem but disagree on the best way to stop them, bickering over how to legislate.

The issue is a contentious topic in the US presidential election with Democratic candidates Hillary Clinton and Bernie Sanders, along with Republican frontrunner Donald Trump, all condemning the practice.

Mr Trump said on Tuesday that the number of companies leaving the US through inversions was “disgraceful.” He has regularly cited Pfizer’s proposed move to Ireland during campaign events over recent months.

Among the pending inversion deals that have yet to close are the $16 billion merger of Johnson Controls, a US maker of car batteries, and Cork-based Tyco International, a transaction that Mrs Clinton has branded a “perversion” of the tax system at her campaign events.

Additional reporting Reuters