Small break fee fuels fears over Pfizer’s Allergan deal

Pfizer and Allergan would have to pay the other party just $400 million if either were to pull out of their $160 billion deal due to a change in the law – a tiny break-up fee for such a large transaction and one that threatens to fuel concerns the combination could fall through.

The termination fee for pulling out of the deal for other reasons would stand between $3 billion and $3.5 billion, in line with other deals of this size, but the merger agreement allows the companies to walk away for a fraction of that amount “due to an adverse change in the law”.

Analysts and investors said there was nervousness the largest "inversion" deal could fall prey to political interference, because it would allow Pfizer to avoid at least $21 billion US tax bills by moving the combined group to Ireland, where Allergan is based.

In a note to investors, analysts at Evercore ISI said the $400 million break-up fee signalled a “lack in absolute confidence that the US treasury could not force a change in regulations prior to the close of the transaction that would negatively impact the deal”.

Tax inversion

The merger agreement was published as Pfizer kicked off a round of meetings with top shareholders to garner support for the biggest tax inversion in history, as market reaction suggested investors were pricing in a significant chance of the transaction collapsing.

Shares in Allergan were at $309.70 in New York afternoon trading, about 15 per cent below Pfizer’s all-stock offer, which was worth about $362 a share – a large discount given that both boards have signed off on the friendly deal.

There was a chorus of opposition from Democrat politicians when the deal was announced on Monday, and from Donald Trump, the Republican presidential nominee, who said "the fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting". Pfizer has not said how many jobs will be lost following the merger, but it expects to cut costs by $2 billion over three years.

There is also discontent among large Allergan investors, some of whom believe the company is being sold on the cheap and is worth at least $400 a share or more. "There is some concern around the federal government trying to block the deal – people are just not reassured," said Ronny Gal, an analyst at Bernstein. "There is also a secondary concern investors in Allergan, who are unhappy with the price, will revolt against the deal."

The long timeline for completing the deal – it will not be consummated until the latter half of next year – is adding to nervousness, according to one Allergan investor. Pfizer's decision to ditch its last attempt at an inversion – the £69.4 billion takeover of Britain's AstraZeneca – in the face of political opposition was also a concern, the investor said.

Some analysts believe Pfizer and Allergan purposely underplayed some of the deal's financial benefits and refrained from offering details of what are expected to be huge share buybacks, to avoid fuelling political opposition. "We believe Pfizer and Allergan are strongly incentivised to understate potential tax, operating expenditure [savings] and earnings accretion given the heavy political scrutiny underpinning the planned inversion out of the US," said Andrew Baum, analyst at Citi. The Financial Times Limited