Breaking up can be hard to do. It can also be expensive, which would be the case for Pfizer if the roughly $150 billion deal it is reportedly negotiating with Allergan were to go south. But the potential cost is a sum that Pfizer is reportedly willing to wager as it tries to outrun changes in the U.S. tax code that would make the kind of tax-inversion deal it is negotiating unpalatable.
Pfizer ($PFE) is reportedly close to announcing an all-stock merger with Allergan ($AGN), which sources told Bloomberg would be for $370 to $380 per share. Reuters, also citing sources, says a 2% to 3% breakup fee is being negotiated. The penalty would be in the range of $3 billion to $4.5 billion if they reach an agreement at the suggested share price. The highest breakup fee reportedly ever paid was the $4 billion AT&T ($T) shelled out to T-Mobile ($TMUS) for a canceled deal.
One person who would like to see that happen is U.S Treasury Secretary Jacob Lew, who said on Thursday that his agency was rushing out new guidance designed "to deter and reduce further the economic benefits of corporate inversions." Last fall, the Treasury Department put the wrench to tax guidelines to make inversions less appealing.
|U.S. Treasury Secretary Jacob Lew|
According to Reuters, the Treasury Thursday said that it was making some rule changes effective immediately and some retroactive to Sept. 24, 2014, when it last revised the rules pertaining to the inversions. It said it would limit the ability of a U.S. company to establish itself as the parent firm in another country and to "stuff" assets into that entity to meet the required ownership limits to make a deal effective.
While the Treasury Department can revise tax guidelines to render the inversion deals more difficult to structure, the agency can't block them without action in Congress. Whether the changes could dissuade Pfizer is an unknown. Allergan pulled off an earlier inversion deal when it was acquired by Ireland-based Actavis (which then took the Allergan name). Actavis got its Irish address in a merger with Warner Chilcott.
Lew and the Treasury Department can actually take credit for nixing a sizable inversion deal last year. AbbVie ($ABBV) opted pay a $1.64 billion breakup fee when it walked away from its $54 billion tax-inversion deal to buy Dublin-based Shire ($SHPG). AbbVie was looking to broaden its portfolio, which leans heavily on megablockbuster Humira, and figured it would lower its tax bill in the process. AbbVie cited the tax rule tweaks as the reason for bagging the acquisition, saying they "introduced an unacceptable level of uncertainty to the transaction."
AbbVie shrugged it off and focused instead on a deal for a U.S.-based drugmaker. It pulled off a $21 billion acquisition of California-based cancer med maker Pharmacyclics ($PCYC) earlier this year.
Shire pocketed the breakup fee, booked a big profit in the following quarter then turned around and used the cash to help finance a $5.2 billion buyout of New Jersey-based NPS Pharma, shifting its tax load to Ireland. Shire is now in pursuit of Baxalta ($BXLT), which was created in July with the spinoff of Baxter International's ($BAX) drug business. Baxalta has balked at a tie-up, but if it were to come to pass, the deal would take another U.S.-based company and move its tax base to Ireland.
Special Reports: The top 15 pharma companies by 2014 revenue - Pfizer | Pharma's top 10 M&A deals of 2014 - Actavis/Allergan - Actavis/Forest Laboratories