MergerMArket
Shire: Takeda relationship banks could finance bid, sources say
- Partial asset sales seen key to 2x net debt/EBITDA target
- Dilution north of 30% to prompt pushback – Takeda investors
Takeda Pharmaceutical’s [TYO:4502] main banks – Sumitomo Mitsui Banking Corp (SMBC), MUFG Bank and Mizuho Bank – are willing to lend JPY 2trn to JPY 3trn (USD 19bn – USD 28bn) or more if necessary to fund a takeover of Shire [LON:SHP], said sources familiar with the situation.
The sources say many Japanese companies are awash with cash, so the banks are having a problem finding borrowers. “There is no reason for Takeda to be unable to borrow,” one of the sources said, “Takeda is a perfect blue-chip company in Japan.”
Another source said Osaka-based Takeda has especially close and long-term ties with SMBC, which was also based in Osaka initially. Moreover, SMBC is also considered to have a higher risk appetite than its mega bank peers, the second source added.
The sources say many Japanese companies are awash with cash, so the banks are having a problem finding borrowers. “There is no reason for Takeda to be unable to borrow,” one of the sources said, “Takeda is a perfect blue-chip company in Japan.”
Another source said Osaka-based Takeda has especially close and long-term ties with SMBC, which was also based in Osaka initially. Moreover, SMBC is also considered to have a higher risk appetite than its mega bank peers, the second source added.
Spokespeople for MUFG and Mizuho said they cannot make comments on individual lending situations. Sumitomo Mitsui Financial Group (SMBC)’s spokesperson declined to comment.
Nevertheless, it looks like Takeda needs to be quite creative in forming a hybrid structure of financing combining cash, equity, convertible bonds, and asset sales, in a possible GBP 36.5bn (USD 51.6bn) acquisition of Shire to keep its net debt/EBITDA multiple from rising much above 3x, according to bankers and Dealreporter analytics.
At a briefing for sell-side analysts last week, Takeda’s CEO Christophe Weber indicated Takeda is exploring the acquisition of Shire in its entirety. Even if the net debt/EBITDA multiple rises above 3x over the near term, Takeda would work to quickly bring this down to around 2x, according to a Tokyo-based analyst.
Weber also indicated Takeda would be looking to maintain its current credit rating of A1 by Moody’s and has no plan to change its dividend policy of JPY 180 DPS, the analyst said.
Based on precedent deals premium analysis, Japanese bidders on average offered a 30% premium to the unaffected share price before announcement. At a 30% premium to Shire’s share price of GBP 30.70 prior to the initial announcement of 28 March, Takeda, for instance, would require GBP 36.5bn (USD 51.6bn) to finance the acquisition. As of the three-month period ended 31 December 2017, Takeda has JPY 440.3bn (USD 4.1bn) on hand and reported net debt of JPY 698bn (USD 6.5bn) and a 12-month rolling EBITDA of JPY 502.6bn (USD 4.7bn).
Shire, meanwhile, has USD 18.6bn net debt with an EBITDA of USD 6.5bn as of financial year ended 31 December 2017.
Shire’s equity value is almost USD 8.8bn higher than Takeda as of 11 April. With a 30% premium as per the aforementioned scenario (Shire is up 17% since announcement), Takeda would need to arrange financing of more than USD 47.5bn on top of its available cash on hand, according to Dealreporter analytics.
Given the assumptions above, the following are several possible scenarios for financing this acquisition based on a 30% premium, according to Dealreporter analytics:
At a briefing for sell-side analysts last week, Takeda’s CEO Christophe Weber indicated Takeda is exploring the acquisition of Shire in its entirety. Even if the net debt/EBITDA multiple rises above 3x over the near term, Takeda would work to quickly bring this down to around 2x, according to a Tokyo-based analyst.
Weber also indicated Takeda would be looking to maintain its current credit rating of A1 by Moody’s and has no plan to change its dividend policy of JPY 180 DPS, the analyst said.
Based on precedent deals premium analysis, Japanese bidders on average offered a 30% premium to the unaffected share price before announcement. At a 30% premium to Shire’s share price of GBP 30.70 prior to the initial announcement of 28 March, Takeda, for instance, would require GBP 36.5bn (USD 51.6bn) to finance the acquisition. As of the three-month period ended 31 December 2017, Takeda has JPY 440.3bn (USD 4.1bn) on hand and reported net debt of JPY 698bn (USD 6.5bn) and a 12-month rolling EBITDA of JPY 502.6bn (USD 4.7bn).
Shire, meanwhile, has USD 18.6bn net debt with an EBITDA of USD 6.5bn as of financial year ended 31 December 2017.
Shire’s equity value is almost USD 8.8bn higher than Takeda as of 11 April. With a 30% premium as per the aforementioned scenario (Shire is up 17% since announcement), Takeda would need to arrange financing of more than USD 47.5bn on top of its available cash on hand, according to Dealreporter analytics.
Given the assumptions above, the following are several possible scenarios for financing this acquisition based on a 30% premium, according to Dealreporter analytics:
- All cash – Takeda would need to borrow at least USD 47.5bn to finance the acquisition entirely by cash because of Shire’s net debt/EBITDA at 2.9x (the company is heavily geared since the USD 32bn acquisition of Baxalta in 2016). It would put the pro-forma net debt/EBITDA at 6.8x.
- A combination of cash and equity – Takeda can borrow up to JPY 2trn (USD 18.7bn) and put its net leverage to over 4x while the rest of the financing would need to come from equity (exchange offer) or capital raisings. Dilution would be at 46%.
- Another combination of cash and equity – Takeda borrows up to JPY 860bn (USD 8bn) and put its net debt/EBITDA multiple to 3.3x, and the rest of the financing to come from equity (exchange offer) or capital raisings.
- All share deal – Pro-forma net debt/EBITDA would be 2.2x without any extra debt, yet the dilution would become 57.9% of the combined company. But currently, Takeda is not traded on LSE so it is unclear how an equity bid would be structured.
Thus, if Takeda combines USD 8bn in borrowed cash plus equity (exchange offer or public offering), the dilution would be around 53.9% and the pro-forma net debt could stay at around 3x as Takeda’s CEO indicated.
But this 53.9% dilution would not be acceptable to Takeda investors in Japan, fund managers told this news service. To bring this dilution down to the acceptable level of 30%, Takeda has to sell GBP 19bn (30%) worth of assets at the combined company.
If Takeda borrows USD 18.7bn and uses equity, the dilution would be 46% and the pro-forma net debt could be around 4x. To bring this 46% dilution to 30%, Takeda must sell at least GBP 11.7bn (18%) worth of assets at the combined company, according to analysis by this news service.
A Tokyo-based institutional investor who holds a stake in Takeda asked: “Will Takeda really do this deal? We can never accept such a huge dilution. I would definitely object to this acquisition plan.”
Takeda, which has been paying a solid dividend of JPY 180 per share, is known as a dividend stock and therefore has been the most popular Japanese stock, especially, for individuals with NISA (Nippon Individual Savings Account) accounts in Japan.
Another Tokyo-based fund manager said many NISA investors expect Takeda to continue to pay stable and high dividends. In fact, many existing Takeda shareholders should be worried that this stock may be becoming a different kind of stock after the acquisition of Shire, the fund manager said.
Weber indicated last week Takeda would quickly bring the net debt/EBITDA multiple down to around 2X, even though it rises above 3x over the near term, but he also said Takeda is not considering purchasing only some businesses or assets of Shire, the analyst said.
However, in each of the above scenarios with a cash component, if the combined company does not resolve the high debt level of Shire (either by selling businesses with high debt or non-core assets to improve its financials), it is not possible for Takeda to bring down its net leverage back to 2x, according to Dealreporter analytics.
A few Tokyo-based ECM bankers said, meanwhile, the size of a public offering (and an exchange offer) should be kept at less than 20% to 30% of a company’s market cap. “If the size of equity offerings exceeds 30%, the company will be asked to explain what kinds of growth plans the company has to justify such a dilution,” said one ECM banker.
“This is such an atypical way of acquiring a company by a Japanese company,” said one Hong Kong-based investor. “So far, every single Japanese bidder did acquisitions in cash. They are carefully planned. They bought target companies that could be affordable. They all paid a lot of premiums.”
Takeda will make an announcement in accordance with the UK’s Panel on Takeovers and Mergers regulations by 5pm on 25 April (UK time) and will announce by the same date whether it will submit an offer to Shire, a Takeda spokesperson said.
The share price of Takeda closed 1.1% higher at JPY 5,055 in Tokyo on Wednesday (11 April). The share price of Shire, meanwhile, traded 0.7% lower at GBP 36.27 at market close 11 April.
But this 53.9% dilution would not be acceptable to Takeda investors in Japan, fund managers told this news service. To bring this dilution down to the acceptable level of 30%, Takeda has to sell GBP 19bn (30%) worth of assets at the combined company.
If Takeda borrows USD 18.7bn and uses equity, the dilution would be 46% and the pro-forma net debt could be around 4x. To bring this 46% dilution to 30%, Takeda must sell at least GBP 11.7bn (18%) worth of assets at the combined company, according to analysis by this news service.
A Tokyo-based institutional investor who holds a stake in Takeda asked: “Will Takeda really do this deal? We can never accept such a huge dilution. I would definitely object to this acquisition plan.”
Takeda, which has been paying a solid dividend of JPY 180 per share, is known as a dividend stock and therefore has been the most popular Japanese stock, especially, for individuals with NISA (Nippon Individual Savings Account) accounts in Japan.
Another Tokyo-based fund manager said many NISA investors expect Takeda to continue to pay stable and high dividends. In fact, many existing Takeda shareholders should be worried that this stock may be becoming a different kind of stock after the acquisition of Shire, the fund manager said.
Weber indicated last week Takeda would quickly bring the net debt/EBITDA multiple down to around 2X, even though it rises above 3x over the near term, but he also said Takeda is not considering purchasing only some businesses or assets of Shire, the analyst said.
However, in each of the above scenarios with a cash component, if the combined company does not resolve the high debt level of Shire (either by selling businesses with high debt or non-core assets to improve its financials), it is not possible for Takeda to bring down its net leverage back to 2x, according to Dealreporter analytics.
A few Tokyo-based ECM bankers said, meanwhile, the size of a public offering (and an exchange offer) should be kept at less than 20% to 30% of a company’s market cap. “If the size of equity offerings exceeds 30%, the company will be asked to explain what kinds of growth plans the company has to justify such a dilution,” said one ECM banker.
“This is such an atypical way of acquiring a company by a Japanese company,” said one Hong Kong-based investor. “So far, every single Japanese bidder did acquisitions in cash. They are carefully planned. They bought target companies that could be affordable. They all paid a lot of premiums.”
Takeda will make an announcement in accordance with the UK’s Panel on Takeovers and Mergers regulations by 5pm on 25 April (UK time) and will announce by the same date whether it will submit an offer to Shire, a Takeda spokesperson said.
The share price of Takeda closed 1.1% higher at JPY 5,055 in Tokyo on Wednesday (11 April). The share price of Shire, meanwhile, traded 0.7% lower at GBP 36.27 at market close 11 April.