A dreary loan market this year has been enlivened by news of the $57bn bridge financing, while the $19bn equity component of the financing will include a rights issue likely to be one of the largest ever, at an estimated $12bn-$15bn.
The deal will also include senior and hybrid bonds and mandatorily convertible bonds.
The all-cash takeover at $128 a share was announced on Wednesday, after Monsanto had declined earlier offers of $122 in May and $125 in July.
The winning bid is a 44% premium to Monsanto’s closing price on May 9, the day before Bayer made its first written proposal.
If it closes, the merger will create the largest agrochemical and life sciences company in the world, though its fruition is still a long way off. Bayer expects to receive the required regulatory approvals and complete the deal by the end of 2017 but it faces intense negotiations with regulators in 30 countries before that.
Monsanto’s stock fell 2% on Thursday morning — more than the 0.6% it rose on Wednesday after news of the agreement broke — suggesting doubts from investors as to whether the deal will ever be cleared by regulators.
The first piece of the financing to be executed will be the $57bn bridge loan, underwritten by five banks. It will later be refinanced with senior bonds and subordinated hybrid debt.
Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, HSBC and JP Morgan are underwriting the bridge loan.
Of that line-up, BAML and Credit Suisse are financial advisers to Bayer on the takeover. Morgan Stanley and Ducera Partners are advising Monsanto. Rothschild is an additional financial adviser to Bayer.
Bayer could complete the smaller component of the equity financing, the mandatory convertibles, before the merger is cleared by shareholders and regulators. But a source close to the deal said it would be a “fair view” to believe that none of the transactions would be concluded until the deal was cleared.
Due to the specialist nature of the instrument, the mandatory convertible bond is unlikely to make up more than a quarter of the offering without also breaking records.
“The largest mandatory I can remember is €5bn but it’s not a mainstream product," said an ECM banker away from the deal. "The equity investors would be taken offside a bit, possibly bent out of shape, if an equity transaction in the form of mandatory convertible was larger than €5bn.”
The biggest mandatorily convertible bonds recorded by Dealogic were a €7bn deal issued by Santander in October 2007 as part of the financing for its takeover of ABN Amro, and the $6.6bn deal in June this year by Softbank, exchangeable into shares of Alibaba.
Many convertible investors do not much like mandatories, since they do not offer the same downside protection as an ordinary CB. The investor has to receive the shares, even if they fall in value.
But there is precedent for European companies such as Volkswagen and Fiat issuing large mandatory deals.
“They’re always hedge fund-targeted — it’s about making sure there’s enough stock borrow available,” said one investor. “There might be some equity income funds, too — the deals are usually quite generous on income, compared to the dividend on the stock.”
This means that the bulk of the $19bn target, probably at least $12bn and perhaps as much as $15bn, will be taken up by the rights issue, making it one of the largest in history and almost certainly the biggest by a non-financial institution.
Bayer has not yet publicly announced the split in size between the rights issue and the mandatorily convertible bonds.
“I think it will leave us with five rights issues of a similar size. France Télécom, HSBC, Commerzbank, RBS and ING Bank. [Bayer] would be absolutely enormous,” the banker said.
There have only ever been five rights issues over $13bn, all by European banks between 2007 and 2010, according to Dealogic data.
Comparing the sizes of the deals is problematic, due to foreign exchange fluctuations over the years. In dollar and euro terms, Royal Bank of Scotland’s was the largest deal, but HSBC’s raised more in sterling.
Bayer blowout resuscitates loans
The $57bn bridge loan brings the biggest deal of the year to a drab loan market where European corporate borrowing is down 38% year on year. The loan is already in syndication, according to two bankers, though the $57bn prize may be creamed off only by a small group, as it may just be syndicated to Bayer’s relationship banks.
BAML and CS were picked first to finance the deal in May. Other banks pitched to join the top tier in recent months and Bayer announced the final five this week.
A wider syndication of the loan was in motion on Thursday, according to two officials at Bayer’s relationship banks.
“They [the lead banks] will be holding nearly $60bn and they won’t want to be sitting on that risk for too long,” said one banker.
Another banker said the loan was likely to be syndicated only to Bayer’s close banks. “I wouldn’t expect any banks will decline to participate but I doubt it will go outside the relationship group.”
One EMEA head of debt capital markets said the loan would be very well subscribed, since many banks were keen to participate in this type of transaction.
Though Bayer has increased its bid for Monsanto twice, the loan terms have not changed since the first offer, said one banker. “From what I gather it is pretty much the same deal that was contemplated back in May,” he said. “The terms made perfect sense then and we thought they still did when we looked at them again.”
Bankers from the leads were unavailable, or declined to comment on the syndication on Thursday.
Bayer’s deal is reminiscent of Anheuser-Busch InBev’s record-breaking $75bn loan in October 2015, when 21 relationship banks rushed to take part.
“You saw with AB InBev last year that there is plenty of liquidity to support M&A transactions of this size,” said a banker at another of Bayer’s relationship banks. “You saw lots of banks come in with big tickets. That gives the strong expectation that Bayer will get its deal done comfortably. Add that to the fact that there is not much else out there. People are scratching around for business.”
In Bayer’s last acquisition — the $14.2bn acquisition of Merck & Co’s consumer care unit in 2014 — Bank of America Merrill Lynch, BNP Paribas and Mizuho underwrote the $14.2bn takeover loan. Twenty-three other banks joined in syndication.
Jumbo M&A welcome for bonds
While the loan is already in gear, corporate bond market participants may have to wait until next year before seeing their share of the Bayer-Monsanto pie. But when the deal does come to market, the issuer can be confident of a strong reception. A banker with knowledge of the deal also compared its significance to AB InBev’s.
“It will be great to see some M&A-driven supply,” said one head of EMEA DCM in London. “We need new supply. With the European Central Bank buying so much it means a shortage of paper out there.”
The bond issue will not be as big as AB InBev's, but will still be large. “They have already said that they will do a significant slug of equity but even when you take off the equity component there remains a sizeable slug that could be done in other markets,” said another banker with knowledge of the deal.
Enthusiastic hybrid capital investors will be even more pleased at the prospect of issuance. “Hybrids have been a shocking market this year,” said one senior syndicate banker in London. “It is very much a momentum-driven play and Telefónica’s trade from last week is still trading a little wider; a lot of names haven’t fully retraced from the widening they saw during volatile periods. But a new hybrid will get a lot more attention than product in the secondary market. I wouldn’t be too worried about getting it away if I was them.”
Bayer is rated A3/A-/A and is on review for downgrade by Moody's and on rating watch negative by Standard & Poor's and Fitch.
On Thursday, S&P cut Monsanto's rating one notch to BBB, and said its credit measures at the end of 2016 would be weaker than expected as a result of the combination. Moody's and Fitch also put it on review for downgrade this week. Monsanto is rated A3/BBB/A-.