Allergan shares declined today despite a price target increase from analysts at Susquehanna Financial Group. Multiple media sources have been reporting that Allergan is close to finalizing a deal with Pfizer. Shares of Allergan declined by as much as 2.4% to $303.33 per share today as investors worried about regulators’ attempts to derail what could end up being a massive tax inversion deal.
Pfizer shares slumped also, declining by as much as 3.21% to $32.34 per share.
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Pfizer said to negotiate massive breakup fee
Reuters reports that Pfizer is attempting to get Allergan to agree to a breakup fee of 2% to 3% of the total deal value. If the deal goes through, Pfizer would acquire Allergan for about $150 billion. Putting such a massive breakup fee in the agreement is an indication that the two companies don’t believe that there is much a risk of regulators blocking the deal even though the U.S. Treasury Department is working toward tightening the rules on tax inversion mergers.
The fee would be one of the largest breakup fees ever if the companies agree to it. The merger between Pfizer and Allergan would also be one of the largest ever. Media reports suggest that a deal may be announced as early as Monday and that Allergan could fetch a valuation of between $370 and $380 per share.
Allergan’s near term hangs on Pfizer deal
In a report dated Nov. 19, Susquehanna analyst Andrew Finkelstein said he has increased his price target for Allergan from $350 to $370 per share and maintained his Positive rating on the stock. He thinks Allergan’s near-term outlook depends heavily on the rumored merger with Pfizer or possibly another key merger or acquisition even though the Treasury Department is seeking to deter tax inversion deals.
He added that just because the agency is seeking to reduce the benefits received through tax inversion deals, it doesn’t mean that a merger between Pfizer and Allergan won’t go through. The analyst said that the Treasury Department proposed to limit inverted companies’ ability to use cash in the fall of last year. The agency also threatened to retroactively fight earnings stripping.
Treasury can’t stop all inversion deals
Finkelstein noted that this week’s announcement doesn’t indicate whether these proposed measures will make it into the final rules or if deals in which the shareholders of the foreign company (which in this case is AGN) who own more than 40% of the combined equity of the merged company would be affected equally with all deals.
The Treasury Department did say this week, however, that any measures it decides to take can’t stop all tax inversions and urged lawmakers to step in.