The "B" loan backing Burns Philp & Co.'s planned takeover ofGoodman Fielder is getting a wintry reception from U.S. investors, and the Australian ingredient maker has had to spice up the tranche. The US$375 million "B" piece, backing a US$1.4 billion takover bid, was juiced up from its LIBOR plus 4% level to LIBOR plus 41/ 2%, with lead underwriter Credit Suisse First Boston pumping up incentives to include a 21/ 2% LIBOR floor, 102,101 call protection and a 1% upfront fee--up from 25 basis points previously.
"Historically, people are concerned when [mergers] are hostile," said one market player, pointing to reasons why several investors are sitting back on the loan. Additionally, the credit is somewhat complicated, a banker said, noting that the nature of the funding and the company's offshore position may have added to buyside resistance levels. CSFB officials declined comment. Burns Philp spokesman, Richard Colquhoun, referred questions to company releases.
Jonathan Snape, Salomon Smith Barney food products analyst in Australia, said changes to the deal were not unexpected. "Given the spreads on last year's [93/ 4%] $400 million in notes, this [pricing boost] would not come as much of a surprise," he said. "If you look post-takeover, [Burns Philp is] looking at 370% debt to equity, so that is fairly high." He also mentioned Burns Philp's major refinancing problems in 1998 following the write down of its U.S. spice business. Covenant breaches put the company in hot water for awhile, he explained. "The capital structure disguises how big the company really is," he added, explaining how Burns Philp's diluted capital figures can be deceiving.
The success of the takeover is still in question. Snape noted that the Goodman bid requires 90% shareholder approval. He explained that about 20% of shareholders are retail investors, who would most likely listen to board recommendations to deny the transaction. Burns Philp needs at least half of that group's go ahead to catch the approval minimum and get its hands around Australia's largest food company.
Still, the Goodman acquisition would nearly triple Burns Philps' revenues to $2.2 billion and add relatively stable cash flow to Burns Philps' existing yeast and spice portfolio, according to a report by Moody's Investors Service. Burns Philp's takeover financing package also includes a five-year, A$1.3 billion facility, which is underwritten by Bank of Scotland International, Credit Agricole Indosuez Capital and CSFB. Snape said that this credit line had closed in Australia. There is also a CSFB $100 million bridge loan, as well as an NZ$250 million capital notes bridge loan. Snape noted that Burns Philp was shooting for an average interest rate of 73/ 4% on all of its new debt.