Teva Makes Good Use of Rate Climate to Fund Allergan deal

The Israeli pharmaceutical company ought to achieve good terms as fixed-income investors flock to corporate bonds.
By Sarah Pringle ,

As Teva Pharmaceutical's  (TEVA) - Get Report  multi-day debt offering road show gets underway, the Israeli drugmaker isn't likely to see a shortage of interest from fixed-income investors following the collapse in government yields in the wake of Brexit.  

"In general, they're certainly picking a good time to test the market," John Atkins of S&P Global Market Intelligence's LCD said on Thursday. "The appetite has been very strong for issuance lately and for M&A driven deals specifically." 

That's good news for Teva, which indicated on a call with investors Wednesday that the finalization of its $40.1 billion acquisition of Allergan (AGN) - Get Report generics business is imminent. The anticipated debt offering will help fund the pending transaction, which besides FTC approval no longer faces any hurdles, according to Teva.  

Teva's shares were nonetheless down 1.46% in pre-market trading on Friday, to $54.18.

Teva management had previously indicated that it was in no rush to replace its existing $22 billion bridge financing, with the possibility of holding off until as late as the fourth quarter. But on a Wednesday conference call, CEO Erez Vigodman said that Teva is "monitoring the bond market and given the very attractive terms currently prevailing" as it considers accelerating its planned debt offering.

The company arranged a series of fixed income investor calls in the U.S. that were held Wednesday and Thursday, while meetings in Europe will be conducted on Monday and Tuesday, according to a filing with the Securities and Exchange Commission.

BofA Merrill Lynch is coordinating the U.S. calls, while Barclays and BNP Paribas are coordinating the European meetings. Credit Suisse, HSBC and Mizuho are also helping arrange the calls and meetings. 

The decision to accelerate funding plans presumably comes amid an opportunity to take advantage of historically low interest rates and the fact that other companies have been able to achieve the lowest funding costs ever seen, Atkins said. 

"I don't assume that they'll have much of a problem on price discovery but we haven't seen what the price looks like yet," Atkins said, referring to what is expected to result in a potentially multi-currency bond sale following its USD, euro or CHF-denominated multi-tranche offerings. 

The June 23 vote by the U.K. to retreat from the European Union fueled a drop in Treasury yields amid growing uncertainty about the global economy, leading companies to leverage what Atkins described as "rate-opportunism." For instance, Walt Disney Co. (DIS) a week ago printed the lowest-ever coupons for 10- and 30-year debt, he noted.

On the deal front, beer giant Molson Coors (TAP) - Get Report on June 28 garnered a record low 30-year coupon by a BBB-/Baa3 issuer, according to LCD, Atkins added. Molson raised $5.3 billion of bonds in total to help back its acquisition of MillerCoors.

Vigodman noted on the July 13 call that Teva now anticipates cost of debt to come in at around 2.8% to 2.9% versus a previously anticipated level of 3.5%.

The size of the debt package may also change, as Teva disclosed Wednesday that total deal costs have narrowed to $35.1 billion from $40.1 billion. Deal financing needs have been trimmed by $4 billion to $23 billion from $27 billion. The improved terms came as a result of larger than anticipated divestiture proceeds required by the FTC, as well as changes associated with working capital adjustments, products retained by Allergan and a change in the expected equity value.

One potential complication is the possibility that regulators will require additional concessions for approval, though Atkins asserted that "any concession that they do have to pay will not sting for Teva, if they do have to pay a concession at all."

The deployment of around $25 billion of projected cumulative free cash flow through 2019—including $2.9 billion of upfront asset-divestiture proceeds—will support Teva's plans to lower its financial debt leverage in the next few years, according to Atkins. 

Teva has indicated that post-transaction it will continue to pursue M&A opportunities in the medium term as it continues to look for ways to bulk up its speciality and biosimilar  businesses as well as grow in emerging markets. Biosimilars, which represent a growing market in Big Pharma, are cheaper imitations of drugs referred to as biologics, but differ from generics because they are not exact copies. 

Of course, the company's deal-making capacity isn't unlimited.

In April, Fitch Ratings warned that after Teva completes the generics deal "elevated debt leverage may linger somewhat," noting that compliance with its credit agreement covenants require it to remain below a debt-to-Ebitda raio of 3.5 times within the subsequent two years. 

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