Allergan Plc (AGN) shares fell about 20 percent in after hour trading Monday [Source] after the U.S. Treasury Department issued rules that would limit “inversion transactions” and the ability of U.S. companies to issue debt to their foreign parents. It appears the rules are aimed at the pending Allergan and Pfizer (PFE) merger.
A reader asks: “Does treasury department news impact investment thesis?” It’s a good question that will take some time to sort out, below are some initial thoughts.
Following the Department of Treasury notice Pfizer and Allergan released the following statement [Source]: “We are conducting a review of the U.S. Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.” The companies involved need more time to evaluate the impact so it follows we would only be speculating on how it may affect the investment thesis.
What we do know is Allergan, prior to the announced merger with Pfizer, was valued by some analysts in the $350 per share range. Pfizer’s offer also tends to support this value range (11.3 Pfizer shares at $31/Pfizer share = $350/Allergan share). In effect Allergan’s recent prices running below $300/share reflected doubt that the deal would go through. The market discounted the price offered by Pfizer and gave us an attractive entry price.
The entry price was (and still is) attractive regardless of the outcome. If the pre merger estimates are reasonable, we will eventually get $350/share for Allergan with or without Pfizer either through Allergan growth or acquisition by another suitor. Pfizer and Allergen may still merge as other synergies exist to support the deal in addition to the “inversion” tax benefits.
According to the merger agreement [Source]: if either company terminates the deal “due to an adverse change in law,” they pay the other party a termination fee of $400 million. The companies seem to have anticipated this possibility and if terminated Pfizer will likely pay Allergan.
This evening the Allergan share price dropped to about $220/share. Buying Allergan at $220/share would offer a potential 60% return assuming the premerger estimates are reasonable at about $350/share. That’s higher than the our estimated Investment Thesis [Source] return of about 44% if the merger goes through. It’s hard to see downside from this level and I’m holding my Allergan shares. If you don’t own them you may want to consider a purchase at these levels.
Disclosure: Long Allergan (AGN)
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