Roche restarts talks on Genentech jumbo loan
Tue Jan 27, 2009 2:32pm GMT
By Zaida Espana and Tessa Walsh
LONDON (Reuters) - Roche has made a fresh round of calls to banks to secure multibillion-dollar loan backing for its Genentech bid, a sign its interest in the U.S. biotech group is still very much alive, bankers close to the deal said.
Swiss drugmaker Roche (ROG.VX) has been testing the water with its banks since late last year, but talks re-opened after Pfizer Inc's (PFE.N) $68 billion bid for Wyeth (WYE.N), which was backed by a new $22.5 billion loan in addition to cash and stock.
"There has been another round of calls (from Roche), so this should progress a bit more, but I'm not sure if this is a genuine start or not. I don't think we will see much in the next two weeks," a banker said.
Roche, the world's largest maker of cancer drugs, has bid $43.7 billion, or $89 per share, to acquire the 44 percent of Genentech Inc (DNA.N) it does not already own.
Initially, shares in Genentech rose to a high of $99.05, but the credit crisis has since raised doubts about Roche's ability to secure the necessary financing to conclude the deal, and many analysts still expect the Swiss company to have to sweeten its offer.
Pfizer's new loan has been interpreted as a sign that the deep freeze in the credit markets may be thawing in the more liquid U.S. loan market, thus boosting Roche's chances of securing the financing it needs for its Genentech bid.
But the deepening European recession has left cash-strapped banks struggling to fund existing clients, and serious questions remain over the availability of capital for big "new money" loans.
"The acquisition of Wyeth shows that mega deals are possible in times of troubled financial markets, so we sill expect Roche to succeed in the planned takeover of Genentech," said DZ Bank analyst Thomas Maul, who expects Roche to "slightly increase" its bid.
NOTHING YET COMMITTED
Roche has reapproached its banks with a new term sheet outlining the proposed financing, banking sources said, but crucially did not give details on the size of the loan or the possible timing of a deal.
"We have an ask on the table, but nothing is committed. They (Roche) have spent time with a couple of banks coming up with a term sheet they think is reasonable, and they've given us an idea," one banker said.
Despite Pfizer's ability to raise a new $22.5 billion loan, bankers said Roche would find it very difficult to raise a massive loan to fund the full amount of the acquisition, which remains the company's preferred option.
Banks are now working on securing approvals from credit committees to do the deal, but the lack of detail in Roche's term sheet is making it difficult for banks to assess market liquidity for a new jumbo loan.
"Banks are checking if there is internal capital to do the deal, quite honestly, I think it will be difficult. The question is -- is there enough capital for a deal of that size," the senior syndicator said.
Pfizer is paying an interest margin of around 300 basis points on its $22.5 billion short-term loan, banking sources said, which is record pricing for an acquisition financing for a highly rated company.
Although Roche would be looking at paying similar margins, sources said, the lucrative return on the loan is currently less of an issue than banks' ability to provide the funds.
BOND MARKET TAKEOUT
The corporate bond market is playing a critical role in companies' ability to access acquisition financing, and the size of Roche's loan will be determined by the amount of debt that can be refinanced in the bond market, bankers said.
"It (the size of Roche's loan) partly depends on how much we think can be done in the bond market," one banker said.
The healthier corporate bond market is open, and Europe has seen record issuance of 35 billion euros to date in January, according to Societe Generale credit strategist Suki Mann, which is offering some reassurance to lenders.
A loan of more than $40 billion would be very challenging even if structured as a bridge loan, sources said. A financing of around $20 billion could be more viable, but would still be a tough call and require quick refinancing.
"$40 billion would require 10 banks doing $4 billion per bank. That's a lot of risk-weighted capital to burn on a single name," a loan syndicate head said.
However, both Roche and Pfizer are highly rated companies with good access to the bond markets, which would allow quick bond market refinancings of short-term bridge loans and allow banks to recycle precious capital.
Pfizer's ratings are under review after the acquisition, but the company is currently rated AAA by Standard and Poor's and Aa1 by Moody's. Roche is rated AA- by Standard & Poor's, AA by Fitch and Aa1 by Moody's.
(Additional reporting by Sam Cage in Basel, Switzerland, editing by Will Waterman)
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Looks like people are still not thinking about NVS as a potential source of cash for this deal which is possible and would change the financing picture.
I noted that articles written about the complex arrangement between Roche and DNA are not completely accurate. Below is a link to a sec filing re: the arrangement.
idea.sec.gov
If you really HAVE to read it, bring coffee. Easiest way to do this maybe to read about the key takeover points and then search for the terms within the filing. |
