Why Analysts Want Allergan PLC (AGN) To Buy Pfizer Inc. (PFE)?
It appears that more and more analysts are joining the chorus for the need to buy Pfizer Inc. (NYSE:PFE) by Allergan PLC (NYSE:AGN). This is contrary to what the current discussions are reportedly centered. The current indication is that Pfizer wants to acquire Allergan. The analysts obviously believe that the residential address of the Ireland would make sense for both the companies to reap rich benefits from taxation point of view. Initially, it was Credit Suisse that mooted the idea, and it now appeared to have been seconded by Nomura. The American company is looking to turn the tide to report growth in the top line at least from the next year and believes that the acquisition should be of immense help to achieve the objective.
Key Points Of Discussions
It was WSJ that initially brought to light the purported friendly discussions between Allergan PLC (NYSE:AGN) and Pfizer Inc. (NYSE:PFE) for a merger. The key point of discussions centered around two factors. The first and foremost was the amount that the American company was willing to pay for the Ireland drug maker. The second point was whether Pfizer was really interested in acquiring Allergan given the current political climate in the United States. No one would have forgotten the experience that AbbVie Inc (NYSE:ABBV) met with after it struck a deal to be merged with Shire PLC (ADR) (NASDAQ:SHPG) to cut down the taxes.
In the current situation too, Pfizer Inc. (NYSE:PFE) might benefit if it is merged with Allergan PLC (NYSE:AGN). However, the establishment is not encouraging such companies to circumvent the tax payment. Therefore, there is an element of doubt whether the company can manage the issues arising out of it. If that has to be avoided, the best course appears to be to engage in the other way of merger. Both the brokerages suggest the method to ensure that the transaction is through without any hurdles.
Deal Cannot Be Treated As Inversion
Both Credit Suisse and Nomura analysts said that since Allergan PLC (NYSE:AGN) is an Irish firm, acquiring Pfizer Inc. (NYSE:PFE) cannot be termed as an inversion. The two brokerages think that their proforma analysis indicated that the Ireland firm acquiring the American firm would be valuable to the shareholders of both the companies. That was because of the higher multiple that Allergan trades compared to Pfizer, i.e. 16.7x compared to 12.8x estimated 2017 EPS.
The transaction would also gain because of the accretion due to the merger. That meant Allergan PLC (NYSE:AGN) can use Pfizer Inc. (NYSE:PFE)’s overseas cash that was trapped and pre-pay some of the debts. That would enable it to issue lower share count to fund any potential deal between the two drug makers.
Credit Suisse and Nomura analysts said that their analysis in respect of Pfizer was that it would be able to generate accretion from a merger in the near-term. They believe that the merger could command a premium of 25%, which means roughly a price of more than $390 for Allergan. The two brokerages said that the agreement should be structured in such a way to enable Pfizer Inc. (NYSE:PFE) to use its trapped overseas cash and the expected $30+ billion of cash from Allergan PLC (NYSE:AGN) to buy back the shares once the acquisition is completed.
The two analysts said that the Ireland firm could also match value by buying Pfizer in an all-stock deal at a premium of 25%. Significantly, the merger would result in an unencumbered access to $60 billion of cash hoard. Such a situation should also warrant a higher multiple compared to the standalone Pfizer Inc. (NYSE:PFE) entity. Therefore, Allergan PLC (NYSE:AGN) need to structure a deal that should enable it to use the merged entity’s cash balance and reduce share issuance. That would drive EPS accretion of over 30% in 2017. The analysts’ thesis sounds good. Will the companies listen to it?
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