Citigroup is slated to shop an $875 million deal backing Pharma Services Holding's cash buyout of pharmaceutical research and marketing firm Quintiles Transnational Corp. for $1.7 billion next month. The deal would pile on bank debt for a company that currently has very little debt, noted David Lugg, analyst for Standard & Poor's. A banker noted that the potential surge in debt multiples--from one time to 4.7 times--would be an important point to consider while looking at the credit. Structure and pricing for the deal is still to be determined, according to bankers. A spokeswoman for Quintiles noted the entire transaction should close in the third quarter. The credit will fund the acquisition along with $415.7 million in equity from One Equity Partners--the private equity arm of Bank One--and $586 million of Quintiles cash. One Equity Partners co-founded Pharma Services with Quintiles' founder Dennis Gillings.
"There's uncertainty about the business because they wouldn't be doing the transaction if they could have profitability on their own," Lugg said, speaking to the reasons for S&P's recent negative credit watch issued for Quintiles' BBB- rating. The threat to leverage is also an issue of concern, he said. Depending on the debt raised in the transaction, the rating could fall in the B category, he added. "Growth has been disappointing," he noted of Quintiles' business. He said since Quintiles bases most of its success on acquiring contracts, its business can be uncertain. Funds from operations could also fall to 17% from 85% after the transaction.
Lugg noted, however, that the company is strong in its market. "Quintiles is clearly the leader in the contract services areas," he said, adding that the Research Triangle Park, N.C.-based company has the widest geography for its business compared to competitors. Moody's Investors Service said last week that Quintiles' Ba2 rating will not be affected by the announcement, but ratings will be withdrawn if the merger transaction is completed.
Citi advised Pharma Services, while Morgan Stanley advised Quintiles' board of directors. The spokeswoman said Morgan Stanley is not involved in the new credit. Quintiles has a 364-day, $85 million revolver led by Wachovia Bank, priced at LIBOR plus 13/4%. Bankers at Citi could not be reached by press time and a Citi spokeswoman declined to comment.
