This morning Pfizer (PFE) announced the long rumored buyout/merger agreement with Ireland based maker of Botox, Allergen (AGN), valuing it at $160 billion. While cost cutting and empire building are at the heart of the justification of the proposed deal, a huge incentive is the combined company’s tax rate in Ireland at 15%, much less than Pfizer’s 25% US corporate tax rate. Tax inversion deals have been a fairly touchy topic of late, and as we head into a Presidential election year, it is likely to hit a fever pitch. The likely Democratic candidate Hillary Clinton is leading the charge, having just issued a statement reacting to this morning’s deal, per Bloomberg:
The proposed deal will not close until late 2016, so it’s likely to be a political pinata for the time being, which is reflected in AGN trading at a nearly 25% discount to the agreed upon purchase price (aided by PFE’s 2% decline). I guess at the core, the deal makes sense for reasons other than tax savings, and after nearly a year of political hot potato the deal will be approved by U.S. and European regulators.
It’s my view that there will clearly be a lid put on shares of PFE for the time being as there are cleaner stories in big Pharma to be invested in, possible targets as opposed to those already in announced deals. But the uncertainty around the deal, the recent selling prior to the announcement, and now the arb selling of PFE has created a situation where options prices in PFE are far higher than normal, with 30 day at the money implied vol 24%, vs 1 year avg of about 18.5%:
Increased options prices present the opportunity for longs to add yield to a stock that has declined 12.5% in the last month, from $36 to $31.50, this morning bouncing off of one year support at $31:
From purely a technical standpoint, the uptrend that has been in place from the 2009 lows has held fairly nicely, and $30 should serve as important long term support:
With the stock’s recent decline, the dividend yield has risen to about 3.5%, coupled with the company’s renewed commitment to $5 billion in stock buybacks in the first half of 2016.
So What’s the Trade?
The recent stock weakness, with the high potential for continued uncertainty and elevated options prices set PFE up for a good candidate to BuyWrite (buy stock and sell out of the money call).
*Trade Idea: Bought 100 shares of PFE for $31.35 and sold 1 Jan16 33 call at .45
Break-Even on Jan16 Expiration:
Profits: of up to $1.65 between $31.35 and $33. Stock called away at $33, but effectively at $33.45, up 6.5%. If the stock is below $33, then you take in the .45 cents premium for the call that you sold, adding about 1.5% yield in 2 months, or about 9% annualized.
Losses: of stock below $31.35, but the 45 cents in premium received for selling the Jan16 33 call will serve as a buffer to $31.05.
Rationale: If the stock can find its footing in and around current levels, and remain range-bound in the low $30s, then the potential to sell 5% out of the money 2 month calls against stock creates the potential for a sort of super yield situation. If you are of the belief that the proposed synergies of these two companies, making the largest pharma company in the world, coupled with what will ultimately be large tax savings makes PFE a must own stock in the space, then it makes sense to look to help finance owning the stock for the time being.