Corporate issuer: Bayer

IFR Awards 2018
8 min read
Owen Wild, Eleanor Duncan

More than two years of toil finally paid off for German drugmaker Bayer in June when it completed a complex multi-stage financing to support its US$66bn acquisition of agrochemicals group Monsanto.

The acquisition was vast in its ambition, creating the largest seeds producer and pesticides maker in the world.

Such a transformative M&A transaction – the largest outbound acquisition by a German company and the largest all-cash deal ever – required an equally enormous financing effort.

Bayer’s skill was in putting in place a flexible funding package and constructively using the months waiting for regulatory approvals to make the back-end funding more manageable.

“We were managing the loan package to allow for any uncertainty, including a friendly or hostile trade, a long period of regulatory approval and a change in the White House,” said Lars Moeller, a director in debt capital markets at Credit Suisse, which was lead financial adviser and structuring bank for Bayer alongside Bank of America Merrill Lynch.

All this, and the sheer heft of the transaction, meant that bankers had to manage a good deal of risk.

For starters, the acquisition facility backing the deal was a mammoth US$56.9bn – the third-largest corporate loan of all time, split into a US$46.9bn bridge loan, a US$4bn three-year loan and US$6bn five-year loan.

Although the loan closed in 2016, the underlying acquisition was completed in June 2018, making the loan eligible for the IFR Awards this year.

TAKE ME OUT

The loan was initially committed to by Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JP Morgan, and was syndicated to a further 21 banks. The take-out that followed was a master class in refinancing risk.

The series of acquisition facility refinancing steps included: €4bn of mandatory convertible bonds, €4.5bn of excess proceeds from selling shares in Covestro, a €3bn private placement, a €6bn rights issue, a US$15bn US dollar bond issue, and a €5bn euro bond offering.

“Each individual piece of the financing is notable,” said Frank Heitmann, a managing director covering German clients at Credit Suisse and previously head of equity-linked at the time of the mandatory CB issue.

“They are some of the biggest trades of the year across asset classes and the concurrent execution of the rights issue, euro and US dollar bond – as well as the exchange offer – was a unique challenge. But Bayer’s successful de-risking strategy made it a lot easier,” Heitmann said

The mandatory issue in November 2016 was the largest ever seen in Europe and the largest equity-linked trade globally since 2003, but only a downpayment on a planned US$19bn of equity issuance.

Plastics-making subsidiary Covestro was listed in October 2015, with Bayer retaining a significant shareholding that was sold over subsequent years. The last slice of Covestro was cleared in May 2018, just ahead of the Monsanto purchase closing, ending a series of five block trades and an exchangeable bond issue.

Covestro completed a restructured all-primary IPO in October 2015 at €24 per share. The stock had doubled within 12 months and peaked at a close of €95 on January 19 2018 – up 295%. The remarkable performance of the stock enabled Bayer to book €4.5bn of “excess proceeds” across the €7.7bn of accelerated sales.

The scale of the financing meant all options were considered from the outset and in April 2018 a €3bn equity investment was secured from Singapore sovereign wealth fund Temasek. The transaction was significant as the rights issue and bond financing would follow regulatory approval and this 3.6% sale came before that confirmation. The company also hadn’t given Temasek any discount.

“The Temasek investment came ahead of the acquisition receiving regulatory approval but the at-market placing of €3bn of equity gave the market further confidence, boosting the share price and helping with de-risking the rights issue,” Heitmann said.

REVIEW FINISHES

Bayer and its banks moved quickly once the 21-month antitrust review came to an end, with the acquisition wrapped up at the start of June and the bond issue and rights issue announced within a fortnight.

Management was on the road selling the €6bn rights issue to investors at the same time as it embarked on a two-day US$20.75bn bond sale extravaganza.

The company relied on the US market for the lion’s share of the volume, pricing a US$15bn eight-tranche US dollar bond offering.

But the bond issue came with a twist for investors: it wasn’t registered with the SEC, and was one of the largest deals ever seen in 144A/Reg S format.

That format usually means that a premium is required, as the bonds may not be eligible to enter many bond indices. But it also means the issuer can sidestep the time-consuming process of registering with the SEC.

Added to all of that, Bayer had not done a US dollar deal since 2014, meaning it was an unfamiliar face for the market – albeit one with crucial rarity value.

Bayer’s equity financing strategy to protect its Triple B rating turned out to be crucial for the bond execution.

“Having the equity in place meant less ratings uncertainty, meaning more pricing tension for the issuer,” Moeller said. “The calibration of ratings was key to the debt working.”

The US$15bn issue was the largest bond Bayer had ever done, and included a 30-year tranche – the longest Bayer had ever issued.

The market gobbled it up, allowing the company to pull in spreads by as much as 20bp from initial talk through the bookbuild.

That cropped the new issue concessions down to 7bp–9bp – and all that despite broader market volatility sparked by fresh worries about a global trade war.

Active leads BAML, Credit Suisse, Goldman Sachs, HSBC, and JP Morgan elected to market only via calls with investors so they could reach as many accounts as possible.

In total, bankers spoke with 225 investors over just three days, Moeller said.

The sweat paid off, with demand totalling US$45bn from 350 investors.

EURO SUCCESS

Bayer had similar success with the euro leg, with investors pouring more than €21bn of orders into the €5bn four-tranche outing.

Bankers used off-the-run maturities of 4.5, eight and 11.5-year tenors and a four-year floater to complement and smooth Bayer’s maturity profile. Barclays, BNP Paribas, Citigroup and Credit Suisse were the leads on the euro offering.

The company’s rights issue – the largest equity deal in EMEA of 2018 – ended days later with a take-up of 98.3%, with the remaining shares dribbled into the market over one day. The company had many relationship banks to keep happy and took the unusual approach of naming all 20 banks involved as joint bookrunners – giving them equal league table credit.

The senior bookrunners, with underwriting of 11.49% each, were BAML, Credit Suisse, Goldman, HSBC and JP Morgan.

Pricing was a relatively tight 20% discount to the theoretical ex-rights price. While the deal couldn’t have been better flagged, its scale meant there were some questions about whether pricing was unnecessarily aggressive.

Shares were trading below the €81 rights issue price within two months, showing that the banks had borne real risk as such a large acquisition comes with risk of delivering on the promises and, in the case of Monsanto, potentially costly legal liabilities.

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Corporate issuer: Bayer