UK-based industrial turnaround specialist Melrose’s £4.5bn-equivalent loan backing its £8bn hostile takeover of engineering firm GKN was carefully designed to cover all potential outcomes, providing flexible long-term funding at a favourable price.
As the largest hostile takeover in the UK since Kraft’s hotly debated purchase of Cadbury in 2009, Melrose’s acquisition of GKN attracted intense scrutiny from politicians, the tabloid press, unions and key customers.
Confidentiality was critical to the success of the deal. To limit the risk of a leak to the public markets, Melrose approached just two banks, Lloyds and Royal Bank of Canada, in mid-December 2017 about financing the takeover.
Within eight days the two banks had secured approval to underwrite 100% of the facilities before the Christmas break, giving Melrose the time to work on other parts of the hugely complex deal.
“This was a bold underwrite, with an extremely high profile, where the scope for something going wrong was quite high,” said Tim Cottrell, head of European leveraged capital markets at RBC Capital Markets.
Any misstep or flaw in the financing would have been seized upon by GKN’s defence advisers.
Unusually for a large acquisition financing, the deal did not feature a bridge facility, but comprised a £1.5bn 3.5-year term loan and a £3bn-equivalent five-year revolving credit facility denominated as £1.1bn, US$2bn and €500m.
The loan was flexible to the proportion of shares to cash in the offer, while there was enough dry powder to cover an increased bid and the potential redemption of GKN bonds. Leverage was not pushed too far, remaining in line with Melrose’s low leverage strategy and avoiding negativity.
Fees were structured so that lenders would be rewarded for initial commitments, while Melrose would receive a favourable rebate on any cancelled debt.
Pricing was competitive, despite substantial uncertainty over the M&A process. The term loan paid an opening margin of 140bp over Libor while the revolver paid 165bp over Libor/Euribor.
The hostile nature of the bid created uncertainty over the depth of market liquidity available for the deal. This was further complicated as a number of banks were relationship lenders to both parties.
“Some banks won’t do hostile financings, there was also GKN’s core relationship banks to consider; a difficult dynamic, how were they going to react?” Cottrell said.
Syndication was launched on January 26 with a bank meeting on February 6. Initial commitments were due by February 23, but banks only formally signed into the deal on April 30, preserving confidentiality for GKN banks coming into the transaction.
The financing closed strongly oversubscribed with a group of 25 banks joining the two bookrunners.
“It was extremely intense. As far as the mechanics of M&A are involved, this was about as exciting as it gets.” Cottrell said.