In a move that surprised no one after credible rumors surfaced last week that it would indeed happen, Pfizer (PFE) and Allergan PLC (AGN) are now one company. The deal is technically considered an acquisition of Allergan by Pfizer, but it’s effectively a reverse merger that will move Pfizer’s domicile overseas to Dublin, Ireland, where Allergan is headquartered — and where corporate tax rates are considerably lower.
As was the case last Thursday, when the pairing was first said to be likely, Pfizer stock dropped following the announcement. AGN shares did, too, as the offer was an all-stock one. Allergan shareholders will receive 11.3 shares of Pfizer stock for every one share of AGN they own, which roughly translates into a purchase price of $160 billion.
The tax-inversion-motivated pairing, of course, raises a handful of questions.
What’s Pfizer Getting?
Allergan is best known for its flagship product, Botox. The company sold more than $600 million worth of Botox (used in cosmetic surgery), accounting for 15% of Q3’s $4.09 billion top line. Allergan also sold $328 million worth of dry-eye therapy Restasis, and generated $269 million of revenue from Nemanda, which treats Alzheimer’s disease.
The real upside for Pfizer stock owners, however, is the synergy created by the two pharmaceutical companies, as well as the tax savings Pfizer can realize by relocating to Dublin.
On the synergies front, the union of the two outfits won’t be staggering. The company told PFE and AGN shareholders it would only find about $2 billion in synergies within the first three years of the deal’s completion.
For perspective, Pfizer has reported income of $8.4 billion on $47.9 billion worth of sales over the course of the past four quarters. Allergan has done $19.6 billion in sales over the past year, and though it hasn’t turned a net profit for non-operational reasons, EBITDA is a solid $7.6 billion for that stretch. Still, that’s not a lot of upside for the $160 billion worth of Pfizer stock soon to be transferred to AGN shareholders.
The rest of the value lies in the tax benefit of combined companies. With the acquisition, Pfizer believes its typical annual tax rate will fall from about 25% to a rate somewhere around 17%-18%. While those new rates will only translate into a few hundred million in savings per year, it will do so indefinitely.
And yet, the news doesn’t have all owners of Pfizer stock jumping for joy.
The Flipside
Given the upside at hand, the 2% pullback from PFE is a bit surprising. Even more surprising is the fact that Pfizer stock is off more than 5% since the deal became likely last Thursday at a price much less than the $400 per share of AGN some analysts were thinking; Pfizer essentially offered $363 per share of Allergan.
What gives?
For starters, the sheer size of the new company may be unwieldy and difficult to manage. Pfizer was already drawing up split-up plans due to its size; distractions stemming from dissimilar business lines were becoming the norm. Now, plans to entertain that idea next year have been pushed back to 2018, with the problem being exacerbated by the impending integration with Allergan.
Another key issue that concerns PFE owners: Whether worth it or not, this stock-based acquisition is going to inject several truckloads of Pfizer stock into the float, which has the potential to drag the price of PFE lower.
Still, another reason a Pfizer/Allergan pairing could end up souring is the possibility that the U.S. tax code could be rewritten in such as way as to quell the upside of this acquisition. Though doing so would be no easy feat — serving as political kryptonite for lawmakers — Democratic presidential candidate Bernie Sanders has already spoken out against the deal, and last week, President Obama tipped his hand when he pressured the Treasury to step up to the plate in an effort to put the kibosh on this and other deals like it.
Bottom Line for Pfizer Stock
Investors clearly aren’t thrilled with the official news today, and for understandable reasons. But, while the upside of the union between Pfizer and Allergan may be modest, there’s little to no downside, and PFE shares are on the undervalued end of the scale right now as is. It may take some time to realize it, but this deal is one that’s going to provide long-term pressure on the stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
