Pfizer to pay up to $4.5bn if Allergan bid fails due to regulatory obstacles

Pfizer is negotiating a 2%-3% break-up fee with Allergan that would be in line with most deals, according to sources, a sign of confidence such a merger could overcome regulatory hurdles.

The break-up fee, to be paid by Pfizer if it were to walk away from Allergan, would come out to $3bn-$4.5bn based on a $150bn deal value.

That would make it one of the highest ever break-up fees in dollar terms.

However, break-up fees are set in relation to the target company’s size.

One of the people familiar said a 2%-3% fee would be at the lower end of similar transactions.

One of the main regulatory concerns about a Pfizer- Allergan merger pertains to the domicile of the combined company. US-based Pfizer could move its headquarters to Ireland, where Allergan is based, to take advantage of lower tax rates.

One Allergan investor on Pfizer: 'Long-term shareholders deserve a larger slice of the pie' https://t.co/r7XgwxcT1g pic.twitter.com/BDx03WyEEZ

— Financial Times (@FT) November 20, 2015

So-called tax inversions have driven other merger deals, but the US Treasury is planning to clamp down on them.

When the Treasury last tightened the rules on inversions in 2014, Chicago-based drugmaker AbbVie paid a break-up fee of close to $1.7bn to peer Shire to abandon its $55bn merger agreement that would have seen it redomicile in Ireland.

The largest break-up fee ever agreed was $10bn, and involved Verizon Communications’ $130bn deal in 2013 to acquire Vodafone’s 45% stake in Verizon Wireless.

The biggest break-up fee that has been paid was for $4bn, when AT&T’s $39bn deal to acquire T-Mobile US was opposed by regulators in 2011.

The sources, who asked not to be identified because the negotiations are confidential, cautioned that the break-up fee and other aspects of Pfizer’s deal with Allergan have not been finalised, and the companies were still waiting for the Treasury to unveil its updated rules on inversions.

Pfizer and Allergan both declined to comment.

Pfizer is negotiating $370 to $380 for each Allergan share.

Allergan shares closed at $302.05, down 2.8% on Wednesday, illustrating that investors are still worried about the deal’s prospects. Pfizer shares ended down 3% at $32.29.

“We struggle to see what the Treasury can do to specifically curb a Pfizer- Allergan combination, however, we also acknowledge the political noise surrounding the redomicile of Pfizer, one of the largest pharma companies in the US, will likely only increase with the announcement of a merger, and likely constitutes the most material hurdle to consummation of transaction of this nature,” Citigroup analysts wrote in a note on Wednesday.

As a wave of inversions peaked in September 2014, Treasury took several regulatory actions to reduce the tax benefits of inverting, while also making new deals more difficult. That slowed deal flow but did not stop it entirely.

For months tax experts have speculated about what could come next from Treasury.

Possible steps might include tightening the rules on two strategies related to inversions, tax experts said: so-called “earnings stripping” and “skinny down” distributions.

Earnings-stripping rules combat shifting of US profits out of the country to low-tax jurisdictions. Treasury has struggled to write new rules on this under present law, said tax experts.

Rules targeting skinny-down distributions are meant to keep US companies from shrinking their operations ahead of inversions to evade standards for minimum levels of foreign ownership in inverted companies.