Press reports indicate that talks between Pfizer (PFE - Get Report) and Allergan (AGN - Get Report) are heating up and that a deal is nearing, but simultaneously the U.S. government's rhetoric around the type of "inversion" deal the two pharmaceutical giants are discussing is getting ratcheted up as well. Despite the political noise, an analyst at Citi says he struggles to see what the Treasury can do to stop the drugmakers from combining if they agree to do so.
NEWS: On October 29, Allergan confirmed that it had been approached by Pfizer and is in preliminary friendly talks regarding a potential deal to combine their businesses. Last night, Bloomberg's Cynthia Koons, Ed Hammond and Ruth David reported that Pfizer is nearing an agreement to acquire Allergan for $370 to $380 per share, citing people familiar with the matter. The two companies are aiming to announce a deal as early as Monday, sources told the publication. Also last night, Bloomberg and The Wall Street Journal said that the Treasury Department will release "targeted guidance" later this week meant to "deter and reduce further the economic benefits of corporate inversions," citing a letter from Treasury Secretary Jacob Lew. "It is important to emphasize, however, that Treasury cannot stop inversions without new statutory authority. Unless and until Congress acts, creative accountants and lawyers will continue to find new ways for companies to move their tax residences overseas," added Lew. This morning, CNBC's David Faber reported, citing sources, that a deal will not be announced on Monday, but Pfizer and Allergan are in the "final innings" of merger talks. The deal will consist of all stock and Pfizer is likely to offer 11-plus shares per Allergan share, Faber noted. Allergan CEO Brent Saunders previously told Financial Times that it would be a "short-sighted intervention by politicians if they were to intervene. What has to happen is the U.S. has to create a competitive environment for companies."
TREASURY ACTION WON'T BE ENOUGH: Citi analyst Liav Abraham tells investors in a research note that Treasury's plans reported yesterday to implement further actions to curb tax inversions were likely spurred by the "imminent announcement" of a Pfizer, Allergan merger. The developments were likely factored into Pfizer and Allergan's assumptions when entering into merger discussions, the analyst believes. He expects a deal to be announced over the near term and keeps a Buy rating on Allergan with a $360 price target. Meanwhile, Susquehana's Andrew Finkelstein said he was not surprised that the Treasury will announce more measures reducing the benefits of inversions, noting that last fall it proposed rules aimed at limiting inverted companies' use of cash and threatened measures to combat earnings stripping on a retroactive basis. The analyst, who raised his price target on Allergan to $370 based on the media report of a deal being near, said Treasury's further anti-inversion action does not mean a deal is off the table, but underscores the "likely delicate" negotiation between the companies over price and risk-sharing.
WRONG TIME TO SELL?: Earlier this month, Bernstein's Aaron Gal said it looked "like the wrong time to sell" for Allergan, given its strong execution and solid product revenue growth, along with the weakness in drug stocks. Consequently, he contended that Allergan shareholders should consider making Pfizer pay "closer to $450 per share" than $400 per share for the company.
PRICE ACTION: In pre-market trading following the report and Secretary Lew's letter, Allergan shares are down about 1.75% to $305, while Pfizer is down 1.5% to $32.80 per share.