Credit Suisse helps Bayer to overcome Monsanto mountain

From left: Frank Heitmann, Joachim von der Goltz, Lars Moeller

Bayer's $66bn takeover of Monsanto has been mammoth in every way. As the sequel to the third largest acquisition facility of all time, the take-out financing has included jumbo senior bond and convertible deals and 2018's largest rights issue. Credit Suisse was the only bank mandated as joint global coordinator or active bookrunner on each of these transactions.

This was the largest all-cash deal ever, though one of its many other superlatives was the time it took to close. German drug and agro-chemical maker Bayer made its initial offer for Monsanto, the US seeds company, in May 2016. After terms were sweetened to $128 a share, giving Monsanto an enterprise value of $66bn, the deal was agreed in September that year.

Hurdles to clear 

Credit Suisse, which has advised Bayer on more than 20 completed mergers and acquisitions, was joint lead financial adviser, alongside Bank of America Merrill Lynch (BAML), and structuring bank.

Bayer finalised a $56.9bn syndicated bridge loan (the third largest ever) with 27 lenders, including Credit Suisse as underwriter and mandated lead arranger. It then began the drawn-out process of securing regulatory approvals in jurisdictions around the world, including the EU, US, Brazil, Canada, India and Russia. Not everyone thought it would succeed, with farmers squeezed by supplier consolidation and Monsanto departing the US.

Others, particularly pharma investors, were not convinced of the acquisition’s strategic virtues, and Bayer's share price reacted negatively. Nonetheless, Bayer and its advisers prepared for success and set about the challenge of refinancing the bridge. Their plans included a significant portion of equity financing to protect Bayer's investment grade rating.

"Bayer targeted $19bn of equity to finance the cash offer," says Frank Heitmann, a managing director in Credit Suisse's investment banking and capital markets division, responsible for coordinating the overall financing of the Monsanto deal.

Closing time 

It was made clear to investors that a rights issue and a bond transaction would only happen when there was certainty of closing. Other steps could be taken in the meantime, however. Early derisking was effected in November 2016 through a €4bn mandatory convertible, due 2019. This was the largest ever mandatory convertible in Europe, the Middle East and Africa (EMEA) and the largest EMEA equity-linked issuance since 2004.

Monsanto shareholder approval was obtained in December 2016. In March 2017, Bayer began selling off shares in Covestro, the plastics business that it had spun off in 2015. By May 2018, with a combination of cash blocks, an exchangeable bond and an equity swap, it had raised more than €9bn from the sale of Covestro shares, delivering excess proceeds of €4.5bn, which went towards paying off the bridge loan.

The company raised another €3bn by selling 3.6% of its own shares to Temasek, Singapore’s state investment company. Bayer CEO Werner Baumann described Temasek, whose total stake was now 4%, as a "long-term investor". Proceeds from the placement helped to reduce the size of the rights issue to come.

Anti-trust considerations prompted the sale of various interests which contributed further to the cash pot. In October 2017 and again in April 2018, Bayer announced the sale of parcels of seed, herbicide and other businesses to BASF for a total of €7.6bn, subject to the closing of the Monsanto deal.

While they waited, Bayer and its advisers used the intervening period to pitch the Bayer/Monsanto story to investors, arguing that it created a "global, innovation-driven life science company", strong in both pharmaceuticals and crop science. "There had been some pushback in the press about management pushing this deal through," recalls Joachim von der Goltz, Credit Suisse's head of equity capital markets for northern Europe. "But the management team was able to do a good job in educating investors."

Coming to an understanding 

The time appears to have been well spent. "By the time we got to closing, most investors understood the attractiveness of the Monsanto acquisition," says Mr Heitmann. That was borne out by the fact that, whenever an anti-trust settlement seemed more certain, the share price reacted positively.

Subject to the BASF disposals, the EU gave the deal its blessing in March 2018. The US Department of Justice finally did likewise at the end of May, describing the BASF sale as "the largest merger divestiture ever required by the US". Officials said that the "personal touch" provided by Mr Baumann, who travelled to the US to lead the anti-trust negotiations, had helped.

With the necessary approvals under its belt, Bayer had the certainty it needed to proceed with its equity and debt issues, 20 months after signing the Monsanto deal. "We were fully prepared for an earlier capital markets take-out, but had allowed for a delay in the design of the financing strategy," says Mr Heitmann, who adds that the bridge financing had been structured accordingly.

The rights issue, the final piece in the equity jigsaw, was announced on June 3, with a subscription period running from June 6 to June 19. Given all that had gone before, the capital increase being sought was less than half of what was originally envisaged, at €6bn. Shareholders were offered two new shares for every 23 they held, for €81 per new share. That represented a discount to theoretical ex-rights price (TERP) of 20.3%.

The shares fell back on the announcement, but not dramatically so. "The market had anticipated a rights issue of this size," says Mr Heitmann. By then, many pure pharma investors had rotated out of the stock, so most that remained were, he adds, "positive" on the transaction.

A two-week roadshow was held in Europe, the UK and US to update investors on the synergies expected from the transaction, and the outlook for healthcare, which some investors had feared would be neglected post-deal.

In the end, investors turned out in force to exercise their rights, with a 98.3% take-up. "That's in line with what one would expect from a successful German rights issue," says Mr Heitmann. "Some investors thought that the discount to TERP was too tight, but the shares always traded at a premium to the subscription price and we were confident that shareholders would support the issue."

Bringing in the bond deals 

The favourable outcome of the rights issue set the scene for two successful bond deals, in euro and US dollars. Once the equity issue was underwritten, both Moody's and Standard & Poor's downgraded Bayer, though not below investment grade.

During three days of marketing, Bayer had nearly 300 calls with investors in the US and Europe. "Investors focused on the initial leverage post-closing of the acquisition, and how the company planned to bring down leverage over time," says Lars Moeller, a Credit Suisse director in debt capital markets solutions, responsible for the debt financing aspects of the acquisition.

The US dollar bond deal was first out of the traps, on June 18, with an extraordinary multi-tranche offering, across three- (fixed and floating), 5.5- (fixed and floating), 7.5-, 10.5-, 20- and 30-year tenors. It was a Rule 144A/Reg S deal. "There was some noise from US investors because it was 144A for life and would not be registered, but in the end it attracted an order book of $45bn," says Mr Moeller.

The transaction was eventually sized at $15bn, the largest dollar deal so far for a German corporate. There were some 350 allocated investors, and all the tranches priced inside guidance.

A day later, a euro deal was launched in four tranches. This was a Reg S only transaction with a four-year floating rate note, alongside 4.5-, eight- and 11.5-year fixed slices.

Final order books were about €19bn, and the issue was sized at €5bn with allocations to some 220 investors. Once again, all tranches were priced significantly tighter than guidance and, in this case, traded up on the break. It was Bayer's largest ever euro deal and the second largest euro offering of the year to date.

"Investors made space in their portfolios as the offering was well flagged and Bayer is viewed as an attractive credit," says Mr Moeller. "The order books were comfortably oversubscribed, particularly in Europe _– an important precedent given recent volatility and as markets are transitioning to [an environment in which the European Central Bank is no longer pursuing its policy of quantitative easing]."