The refinancing will also include a Eu2bn rights issue that could be launched within weeks, a straight bond, a Eu1.25bn hybrid capital issue and the sale of two non-core businesses.
The funds from these deals will refinance the short term bridge financing for the acquisition, which Citigroup and Credit Suisse have fully underwritten.
The bridge loan, believed to be of at least Eu13bn, will be partly syndicated as a club loan within the next month, EuroWeek has learnt. The rest of the loan will be retained by Citigroup and Credit Suisse.
Bayer's swift moves to outline its refinancing strategy for the acquisition and issue the CB are designed to minimise any impact on its ratings. The takeover is expected to increase its debt from Eu5.49bn to around Eu11bn, and analysts believe a downgrade in the company's rating is inevitable.
Moody's has put its A3 rating on review for possible downgrade and Standard & Poor's A rating is on CreditWatch negative.
Citigroup and Credit Suisse also led the CB, which should enable them to reduce the bridge loan as soon as it closes. It is carefully designed to be as equity-like as possible.
The deal is subordinated — ranking pari passu with Bayer's existing hybrid capital issue — and mandatorily convertible into 69.6m new shares, which will expand Bayer's equity by 9.53%.
Yesterday (Thursday) the leads exercised the deal's greenshoe option, bringing it to Eu2.3bn.
An equity-linked banker at one of the bookrunners said the deal gave a strong message about Bayer. "The friendly offer for Schering has been well received by the market, and the consensus view is that the deal is good for both Bayer and Schering," he said. "Moreover, the news that Merck has dropped out of the race for Schering has cleared the air."
Merck had made a Eu14.6bn hostile bid for Schering, which prompted Bayer to reply with its own 'white knight' bid.
Biggest CB for three years
Bayer's decision to fund much of the purchase price of Schering through equity (Eu4.3bn) and cash (Eu3bn) has also been welcomed by investors, said the banker.
Bayer's Eu2.3bn convertible is the largest equity-linked issue since Siemens sold a Eu2.5bn bond in May 2003.
It comes at the end of a lacklustre first quarter in the European equity-linked market, when just Eu5.384bn was raised from 11 issues, according to financial data provider Dealogic.
The three year deal was launched on Wednesday morning and was covered by lunchtime.
It was priced with a coupon of 6.625% from a range of 6.25%-6.75%, and the conversion premium was set at 17%, from a range of 16%-20%.
The reference price was Eu33.03 — the volume weighted average price of Bayer's shares during the period on Wednesday from the launch of the convertible to its close. If the share price does not reach the conversion price before the bond's maturity, it will convert at maturity at the conversion price.
The mandatory nature of the deal meant that it appealed strongly to dedicated convertible buyers and even some equity funds, but there was also some interest from hedge funds.
Buyers were mainly in the UK, France and Germany, although there was some US offshore demand.
The size of the Bayer deal, representing almost 10% of its Eu24.5bn market capitalisation, prompted the stock to fall from Eu34.08 at the close of trading on Tuesday to Eu32.76 at the close of trading on Xetra on Wednesday.
Bankers involved in the deal said some limited shorting by hedge funds might have helped push the stock down but that the number of shares traded on Wednesday was significantly below the theoretical delta of the convertible bond, implying that most investors in the bond had bought it unhedged.
Yesterday (Thursday) the stock closed up at Eu33.09 on Xetra, while the bond was trading at around 100.20 from a launch price of par.
Mitigating debt rise
Bayer's use of a rights issue and mandatory convertible will partly counterbalance the increase in its debt and reduce the impact on its rating.
"Mandatory convertibles are supportive of rating and the balance sheet," said the banker. "They count as pure equity. The decision to raise equity in convertible form also shows that the company has a bullish view on its stock price."
In order to fully conform to the rating agencies' prescriptions and attain as high an equity treatment from them as possible, the deal had some unusual features.
Chief among these is subordination. The CB is not rated, but is pari passu with Bayer's hybrid debt, which is rated Baa2/BBB.
Secondly, there is an accelerated conversion feature. If Bayer's rating falls below Ba2/BB or is withdrawn — the company is currently rated A3/A — the bonds will be automatically converted at the maximum ratio and outstanding interest will be paid in cash.
The coupon deferral feature — the bond's coupons are deferrable at Bayer's option if it has not declared or paid a dividend three months before the coupon payment — also helps to win equity treatment from the rating agencies.
Competitive cost
Although the coupon of 6.625% looks uncompetitive with straight debt, the banker said it was more accurate to compare it with the cost of equity.
"Bayer currently has a dividend yield of 2.9%," he explained. "The coupon of 6.625% is around 5.6% after tax, meaning that it is effectively paying just 2.7% over its dividend cost or around 3.7% before tax.
"But the company gets to keep the first 17% of the upside of the stock. So if, during the lifetime of the bond, the stock increases in value just 2.7% a year — a not unreasonable expectation — the company benefits from a cost perspective."
On that measure the deal compares favourably with similar mandatory convertibles from Allianz, which paid around 5% more than its dividend, and Swiss Re, which paid about 3% more in its deal in December last year.
Research from Barclays Capital noted that the bond offers dividend protection. CB investors can suffer if an issuer raises its dividend, since that makes the ordinary shares more valuable, relative to the CB, which does not receive dividends.
The deal will use a ratio adjustment for dividend payments in respect of the 2005, 2006 and 2007 financial years, above Bayer's current dividend of Eu0.95 a share.
Holders would be fully adjusted for the 2008 dividend if it is proposed, declared or paid before June 2009.
"Interestingly, holders would be adjusted at 105% of the 2007 dividend if no 2008 dividend has been proposed or declared before maturity," Barclays noted.
Laurence Neville
Switzerland
As predicted in EuroWeek, lead bookrunner and global coordinator Credit Suisse priced the Sfr504.6m ($388m) IPO of private equity and hedge fund company Partners Group toward the top of the range last Friday (March 24).
Credit Suisse and joint bookrunner Merrill Lynch sold 8.01m existing shares at Sfr63 from a range of Sfr56-Sfr67.
The deal placed 30% of the company in freefloat — not including the 3% greenshoe.
The stock opened at Sfr79.95 on its first day of trading. Yesterday (Thursday) it closed at Sfr78.
