Merck’s acquisition of fellow pharmaceuticals group Sigma-Aldrich required a great deal of forward planning and the nerve to be the first transaction after the summer break without a roadshow.

In September 2014, German pharmaceutical group Merck announced its largest acquisition to date, the $17bn purchase of US chemicals manufacturer Sigma-Aldrich. Approved by Sigma shareholders three months later, the transaction required extensive financing.

“We knew we had to raise $8bn in the capital markets, which is a huge amount of money. We did not want to be under pressure, so we decided to stagger our issuance,” says Tim Nielsen, head of group treasury capital markets at Merck.

Thus the group issued three distinct transactions: a €1.5bn hybrid in December 2014, a $4bn 144A bond in March 2015, and, most recently, a €2.05bn triple-tranche fixed- and floating-rate issue. “This was the last deal for the acquisition. We are now fully financed and waiting for final approval from EU anti-trust authorities,” says Mr Nielsen.

Even though the final deal was only issued at the end of August, Merck began preparing for it a year earlier when the group’s finance team started meticulously planning and structuring the Sigma acquisition. “We worked out the financing well in advance. We wanted to have various types of financing so we could attract a broad base of investors,” says Mr Nielsen.

Advance party

Thanks to the advance planning, the necessary documentation for the triple-tranche euro deal was in place by March 2015. However, Merck was keen to launch the transaction as close as possible to the completion of its Sigma acquisition. “We issued the euro hybrid and US dollar bond earlier and they incurred negative cost of carry, but that was a kind of safety premium for us,” says Mr Nielsen.

The €2.05bn issue comprises a €700m two-year floating-rate note (FRN), a €800m four-year fixed-rate tranche and a seven-year tranche of €550m. “We had been following the market closely and saw that FRNs were in demand in the current interest rate environment, leading to attractive pricing,” says Mr Nielsen.

The deal had three active bookrunners: Commerzbank, Helaba and Société Générale. In total, Merck has 17 relationship banks and was keen for each to play a role in its acquisition financing. “We trust all of our relationship banks. Accordingly they all played a role in the three bond transactions since December and they did a really good job,” says Mr Nielsen.

The triple-tranche euro issue was launched on August 27, the first transaction after the summer break. The decision to be first was a tough call: the Greek crisis had flared up before the summer, concerns about China were causing volatility through most of August, and some investors, notably those from the UK, were still on annual leave. However, Merck was keen to move.

“Having put all the necessary documentation in place in the spring, we began following the Eurobond market more closely just before the summer break. We talked more frequently with our bookrunners about when to come to market and how exactly to structure and price our deal,” says Mr Nielsen. “It was a challenge to open the market after the summer break, with no reference deals in the market, but we wanted to be ahead of the deal pipeline that was expected to come to market in September.”

The company decided to proceed without a formal roadshow as it had conducted an extensive tour of investors before the hybrid transaction and a subsequent roadshow for its US deal. Merck also has an active investor relations department, which is in regular communication with investors.

Accounting for instability

The decisions to dispense with a roadshow and open the post-summer market proved correct. “Feedback was very good. Everyone was waiting for a high-quality corporate to open the market and investors were happy activity had started again,” says Mr Nielsen. “As a result, the pricing was attractive for us and investors too, as secondary market performance indicated.”

The deal’s success was particularly noteworthy, given market volatility at the time. Recognising this, Merck and its bankers did not hold a go/no-go call until 9.45am on 27 August so they could be sure the timing was right.

Ultimately, the order book grew to more than €6bn, with the four-year tranche particularly in demand. Each tranche was priced at the tight end of guidance: three-month Euribor +23 basis points on the FRN, 0.75% for the four-year fix and 1.375% on the seven-year slice.

“Our banks performed very well. We had lengthy discussions with them about the right pricing,” says Mr Nielsen. “Having seen subsequent transactions, it is clear were able to find the right price. We are very satisfied with the deal.” 

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