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Monday, 18 December 2017

Who dares wins

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In January 2009, amid the most severe credit crisis in history, Pfizer tapped the market for US$22.5bn of interim bank financing to back its acquisition of Wyeth. Only five months later it had offloaded the hefty sum in the bond market. The swiftness of the transaction testified to the financial discipline, ironclad lending relationships, vision and timing of the group. Michelle Sierra Laffitte reports.

Pfizer’s announcement in January 2009 that it planned to acquire Wyeth for US$68bn took the market by surprise, coming amid one of the most severe financial crises of all time. With banks consolidating, recovering from losses and even going under, the task of putting the financing in place seemed impossibly daunting.

The pharmaceutical concern was bullish. It pronounced it had already inked US$22.5bn of committed interim financing that would stay in place 12 months after closing. JP Morgan (lead left), Goldman Sachs, Citicorp, Bank of America Merrill Lynch and Barclays would fully underwrite a bridge loan, with each contributing with US$4.5bn. Pfizer will finance the balance of the purchase price with US$22.5bn of cash and stock, valued at US$23bn at the time of announcement.

Given the timing, there was clearly concern about whether banks would be able to stand behind their commitments. Syndicating the risk in the loan became of one of Pfizer’s top priorities. The deal was launched in February, securing 12 banks, each with a maximum of US$2bn that month, and then up to 34 in March, with one bank having more than US$600m, according to Frank D’Amelio, Pfizer’s CFO.

The high financing cost made taking it out swiftly a priority. The loan had included punitive terms: the banks could not lend as freely as they once did. The terms included a L+300bp spread, 50bp step ups and duration and extension fees – all considered bulky for a Aa2/AAA/AA issuer.

“The capital markets had changed dramatically,” acknowledged D’Amelio. “In order to get that bridge facility, to get those five banks at US$4.5bn a bank, we had to agree to terms and conditions and fees that were dramatically different than they would have been four months prior.” The fee structure provided an incentive to find more permanent financing as soon as the markets allowed, he said.

The mix between Pfizer’s own capital and debt was a product of the times. “We put the bridge together during the most difficult part of the financial dislocation,” said said Rick Passov, Pfizer’s senior vice president & treasurer. “We might have considered a larger bridge loan, had we had confidence that there were banks that were going to remain in place and able to stand behind their commitments. We then looked for ways to reduce our reliance in the bridge loan market.”

Its opportunity came a month later. Recognising its window of opportunity in March, Pfizer issued a US$13.5bn five-part bond that, when completed, left only around US$9bn of loans in place.

“When we announced the acquisition the markets were still dislocated. But a shortly afterwards, the market started opening up a little bit. We saw various companies going out into the market and every single time we were monitoring how much they were raising, what was the duration, what were the terms, what kind of fees, and coupons would they take,” D’Amelio said. Roche’s acquisition of Genentech with an international bond market tap of US$16.5bn was its cue.

Pfizer retapped the market in May, issuing US$10.5bn equivalent in a four-part cross-border bond deal that went well beyond the US$9bn needed to take out the remainder of the bridge, with the remainder set aside for working capital. It was a resounding success, even by pre-crisis standards. The deal confirmed that corporate bonds had supplanted loans as the go-to vehicles for fast acquisition capital.

“The decisiveness of the issuer was remarkable,” said a banker following the transaction. “In one of the worst markets that I’ve seen in my career, Pfizer took advantage of the financing window and was able to offload this gigantic loan with a relative ease, in a remarkable fashion.”

The issuer cited the strength of its relationships, which are seldom more relevant than during tough times.

“Relationship was critical. We have nothing but the highest regards for the company,” a banker close to the transaction agreed. “When the deal was signed there were questions on whether the banks were going to be around. So relationship was key.” A proof of this is that JP Morgan, Goldman Sachs and BofA, three of the main underwriters, were also the company’s M&A advisors.

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