WSJ : Allergan-Pfizer Discussions Include Allergan As Possible Buyer

(RTTNews) - Allergan Plc. (AGN) and Pfizer Inc. (PFE) are considering structuring a merger of the drug companies so that it is an acquisition of Pfizer by Allergan, the Wall Street Journal reported citing people familiar with the matter.

However the deal is technically structured, the much larger Pfizer will effectively be buying the Dublin-based Allergan and assuming a lower offshore tax jurisdiction. Allergan shareholders would receive a premium and end up with 40% to 45% of the combined company. The deal is expected to be mainly in stock, but it could contain a small cash component, the report said.

The companies are likely to strike a deal in seven to 10 days—assuming the talks don't fall apart, the report noted.

It is unclear why Allergan would be the acquiring entity, but the move could make it easier for the companies to sidestep a government crackdown on so-called inversion deals, in which a U.S. company buys a smaller foreign rival and moves its tax headquarters abroad.

As for the terms of any tie-up, Pfizer is expected to swap just over 11 shares for each Allergan share.

On Thursday, the Treasury Department released new rules aimed at discouraging such deals and keeping U.S. companies from putting their addresses in foreign countries to reduce their tax bills.

U.S. Department of the Treasury and the Internal Revenue Service or IRS issued today a notice that takes additional steps to reduce the tax benefits of - and when possible, stop - corporate inversions. U.S. companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes, without making significant changes in the nature of their overall operations.

The Treasury noted that Genuine cross-border mergers make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the United States. But these transactions should be driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of a parent entity to a low-tax jurisdiction simply to avoid U.S. taxes.

Specifically, today's notice makes it more difficult for U.S. companies to undertake a corporate inversion by (1) limiting the ability of U.S. companies to combine with foreign entities using a new foreign parent located in a "third country," (2) limiting the ability of U.S. companies to inflate the new foreign parent corporation's size and therefore avoid the 80-percent ownership rule, and (3) requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized.

The third requirement will need to be met in order to satisfy the current rule that at least 25 percent of the new entity's business activity is in the home country of the new foreign parent. These actions apply to deals closed today or after today.