Express-Medco parries antitrust move to raise US$3.5bn

It was quite a day for Express Scripts, a large pharmacy-benefits manager, on Monday. Just as the company was sounding out investors over a bond backing its purchase of Medco Health, a lobbying group for the biggest supermarket chains in the US came out strongly against the proposed US$29bn mega-merger.

It’s a good thing for Express Scripts that investors, which already owned billions of the company’s merger-related debt, had a lot of confidence in the deal’s viability. Though hamstrung at first, the deal was able to go through — and with low to negative new issue concessions as well.

Aristotle Holding Inc, Express’s merger-funding vehicle, went out to investors Monday morning with a US$3.5bn offering of bonds with maturities of three-, five- and 10-years.

Investors were already very familiar with the Baa3/BBB+/BBB rated credit; in fact, they owned a lot of it. On November 14 last year, when the market was less favorable than Monday, Aristotle priced a US$4.1bn, four-part offering to finance part of the purchase of Medco. That deal came with new issue concessions of 68bp-75bp, a high range investors have hardly seen since.

However, while the market was stronger this time around, there were other forces working against the deal.

Deal criticised

The Food Marketing Institute, which represents 1,500 food retailers and wholesalers who account for about 14,000 pharmacies, announced it had asked the Federal Trade Commission last week to block the Express-Medco merger.

The US$29.1bn marriage between the firms “will destroy competition by creating a behemoth with the power to unilaterally slash reimbursement rates to uncompetitive levels,” the FMI said in the letter, which was quoted by Reuters.

“A merger of these two giants,” it said, “would lead to the demise of the reduced price and free generic drug programs that millions of Americans depend on, and reduce access to other key pharmacy services.”

A merger financed in the bond market, before that merger has closed, is always fraught with uncertainty. But the timing of the FMI announcement made things even more complicated.

The trade was announced as benchmark size. Initial price thoughts had Treasuries plus 210bp-220bp on the three-year part, plus 230bp-240bp on the five-year, and plus 250bp-260bp on the 10-year. Others had less specific whisper levels, using the 10-year tranche in the mid-200s as the locus. The fives were heard 20bp tight of the 10s; the threes were whispered 20bp tight of the fives.

The fundraising was going better than anticipated. Official guidance came out well inside of whispers levels, at plus 195bp area, 210bp area and 225bp area, respectively. The tighter pricing levels suggested a lot of support. And at that point, in the early afternoon, the book size was in the neighborhood of US$13bn.

Shortly afterward, though, investors saw a headline indicating that the FTC was compiling “evidence” intended to block the merger.

Investors and sector analysts, who’d been vetting the credit since the merger was announced in July, largely took the news in stride.

“The article is really no new news, but it’s awfully timely and getting a lot of attention, given it was released on the same day as the second round of financing,” said one analyst.

“The FTC reviewing antitrust issues associated with the ESRX/MHS merger has always been a wild card.”

Indeed, Express Scripts put out a statement around 2:30 p.m. saying they were confident the deal would close in the first half of this year. But by then the stock values of both Express and Medco were already way down. The leads, of course, had to adjust — and this took some time.

The deal ended up launching around 4:00 p.m. and pricing at 5:45 p.m. In the end, it comprised a US$1bn 2.10% three-year at plus 195bp, a US$1.5bn 2.65% five-year at plus 210bp, and a US$1bn 3.90% 10-year at plus 225bp.

There was one adjustment: all tranches priced at a larger-than-normal discount (US$99.508 on the 3-year; US$99.025 on the 5-year and US$97.847 on the 10-year). This move allowed more upside for investors before they hit US$101, which is the price at which the bonds would be called in the event the merger does not go through.

Nonetheless, the concessions on a spread basis were still very impressive compared to the 68bp-75bp concession the company had to pay in November last year — even more so given all the noise around the antitrust issues.

That November trade served as the best pricing comp for the new issue.

The outstanding 2.75% notes due 2014, which priced at plus 240bp, were quoted at plus 180bp. That put the new issue concession on the three-year at about 18bp.

The 3.50% notes due 2016, which priced at 260bp, were quoted at plus 200bp. The premium on the five-year was only 5bp.

Meanwhile, the 4.75% notes due 2021, which originally priced at 305bp, were quoted plus 235bp. The new issue premium was negative 10bp.

Final book size was heard as US$12.3bn. Interestingly, sources heard drops from the US$13bn top were related to the difference between whisper and guidance price — and not because of the headline news.