Allergan plunges 22% on new tax inversion curbs
The Obama administration helped wipe more than $20bn off the market value of Allergan by revealing plans to deter tax avoidance that threaten the Dublin-based drugmaker’s proposed combination with US rival Pfizer.
Allergan’s share price fell more than 22 per cent in after-market trading on Monday on fears that the moves to halt tax-cutting deals, known as inversions, would scupper the company’s deal with Pfizer.
After two years of US companies stoking controversy with deals that shift their headquarters to countries with lower tax rates, the proposed moves marked Washington’s most aggressive effort to crack down on the trend.
Pfizer’s $160bn takeover of Allergan — due to be finalised in the second half of this year — is the biggest proposed inversion to date and its collapse would send shockwaves through Wall Street and Washington.
With Allergan shares tumbling following Monday’s announcement from the US Treasury, analysts at Evercore ISI wrote: “The deal is trading as if it’s 95 per cent dead.”
The potential killer blow appeared to be a Treasury proposal to alter the way the size of companies in mergers is calculated, which would probably affect Allergan and make it harder for its Pfizer deal to qualify as an inversion.
Inversions have drawn cross-party condemnation on the presidential campaign trail, from the Republican frontrunner Donald Trump to the likely Democratic nominee Hillary Clinton.
Bernie Sanders, Mrs Clinton’s Democratic rival, has called on President Barack Obama to block the Pfizer-Allergan deal.
To qualify as an inversion and gain the attendant tax benefits, a merger must result in the shareholders of the non-US company owning a minimum percentage of the new entity — usually 20 per cent.
The Treasury-proposed changes to the treatment of past combinations could make Allergan appear smaller, making it harder to reach the ownership threshold.
“Our initial read is that Treasury finally is trying to disrupt specific inversion transactions after two rounds of more general rule proposals in which they said they were not trying to do so,” said Terry Haines at Evercore ISI.
Jack Lew, Treasury secretary, said: “This will have an important effect, but we cannot stop these transactions without new legislation [from Congress].”
Allergan’s market capitalisation, which stood at nearly $110bn before the announcement, dropped below $90bn.
Pfizer said on Monday: “We are conducting a review of the US Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.”
The latest moves, which came in the form of proposals that could be challenged in the courts by affected companies, were the Treasury’s third attempt in two years to deter inversion deals.
The Obama administration’s first efforts in 2014 focused on making it harder to secure one big benefit of inversions: low-tax access to earnings that US companies have parked offshore.
That helped scupper another pharmaceuticals deal, AbbVie’s planned £32bn takeover of UK-listed Shire. But dealmaking otherwise continued largely unabated, leaving the government looking somewhat toothless.
Another part of this week’s moves seeks to make it harder for inverted companies to use a separate technique called “earnings stripping” to profit from inversions.
This involves making loans from a foreign head office to a US subsidiary so that the interest payments can be deducted from US tax bills.
Mr Lew said the Treasury was “focusing on transactions that generate large interest deductions [on tax bills] by simply transferring debt between subsidiaries without financing new investment in the United States”.
Steve Rosenthal, senior fellow at the Tax Policy Center, a think-tank, praised the Treasury for making a “bold” move.
But Kevin Brady, the top Republican tax writer in the House of Representatives, said: “Instead of unveiling commonsense policies to help American employers compete globally and create new jobs for our workers, the Obama administration just announced punitive regulations that will make it even harder for American companies to compete.”
US executives doing inversions argue that an uncompetitive US tax code puts them at a disadvantage to foreign rivals and is forcing them to flee.
The US tax code has a headline corporate income tax rate of 35 per cent versus 12.5 per cent in Ireland and 20 per cent in the UK.
Equally importantly, the US taxes overseas profits when they are brought home — unlike many other countries — which has prompted a lot of companies to keep their cash stashed in foreign jurisdictions.
Company lobbyists in Washington said before the Treasury’s announcement that they did not think it would be able to come up with rules to halt the tide of inversions.