Fitch: New Treasury Rules Sink Pfizer-Allergan Deal
OREANDA-NEWS. Proposed US Treasury Dept. rules that scuttled the Pfizer-Allergan merger could have broad implications for multinational corporations, including the spate of healthcare companies that re-domiciled in tax-advantaged overseas jurisdictions through inversions during the last several years, Fitch Ratings says.
Treasury and the IRS Tuesday announced plans intended to target "serial inverters" - companies that seemingly reduce taxes by relocating headquarters overseas. Pfizer's subsequent cancellation of its planned merger with Allergan makes this transaction the first high-profile victim of these rules.
The rules propose limiting the amount of money foreign parent companies can lend to US subsidiaries, and also temporarily limit the contribution of recent acquisitions of American companies to the foreign ownership hurdle needed for a transaction to meet the requirements for an inversion. It is this second provision that seems to have sunk the Pfizer-Allergan merger.
Although the Pfizer-Allergan combination offered some interesting strategic benefits, the cancellation of the merger indicates that tax synergies were the overwhelming factor supporting the transaction. In general, Fitch views the tax advantages resulting from a move overseas as beneficial to a company's liquidity and credit profile. The proposed rules erode this benefit by limiting a practice commonly known as "earnings-stripping," which refers to ways for a company with an international domicile to reduce its U.S. taxable profits.
To the extent the proposed rules make it more onerous for multi-national companies to reduce US taxable profits, this rule could lead companies to increase debt to fund shareholder payments. This would somewhat erode liquidity profile benefits that healthcare companies gained through recent overseas relocations. The new rules seem to target use of earnings stripping for shareholder payouts since they do not apply the same prohibitions on earnings stripping for business investment in the US.