US rules against tax mergers sink Allergan shares

Shares of Dublin-based Allergan plunged Tuesday on doubts about the prospects of its merger with Pfizer following new US restrictions on cross-border deals designed to avert US taxes.

The two drugmakers said that they were reviewing their $160 billion merger deal announced last year after the US Treasury revealed new regulations to stymie "inversion" takeovers that would impact government tax receipts.

"We are conducting a review of the US Department of Treasury's actions announced today," they said in a joint statement late Monday. "Prior to completing the review, we won't speculate on any potential impact."

The deal, in which the larger US-based Pfizer would be taken over by Allergan and then move its corporate tax domicile to Ireland, is structured to reduce Pfizer's tax rate from about 25 percent in the US to 17-18 percent in Ireland.

The prospect it could be blocked sent Allergan shares falling sharply.

Near 1520 GMT, Allergan was down 16.3 percent at $232.50, while Pfizer added 1.0 percent at $31.01.

The Treasury's new rules make it more difficult for companies involved in stock-based merger deals to achieve the minimum foreign ownership required to avoid US corporate tax liability.

An acquirer in such a case would be barred from counting as foreign parent stock the acquisitions of US companies in earlier, recent inversion deals.

The rules also seek to block companies in such deals from stripping profits from US subsidiaries by setting up sizable loans to the subsidiaries from the parent abroad that are not related to concrete investments.

The rules "appear targeted to specifically derail Pfizer-Allergan," said a note from Credit Suisse.

Allergan has grown rapidly via acquisitions of US companies Forest Labs in 2014 and Warner Chilcott in 2013 that cut their US tax burdens. These acquisitions were actually made by Dublin-based Actavis, which in 2015, bought US-based Allergan and took its name.

"Clearly, these (Treasury) actions seem to have been targeted to block the Pfizer-Allergan merger," said BMO Capital Markets.

"Based on our initial understanding of Treasury's recent proposals . . . . we believe the tax benefits of the Pfizer and Allergan merger will likely be significantly diminished based on Treasury's recent actions," BMO said.