LPC: US loan market welcomes M&A surge

By Lynn Adler and Jonathan Schwarzberg

NEW YORK, April 28 (Reuters) – US companies have lined up at least US$42.5bn of loans to back a flurry of mergers in sectors ranging from healthcare to food and software in the second quarter as corporations try to grow by acquisition.

Becton Dickinson’s US$24bn takeover of C R Bard in the investment grade medical device sector is the biggest of the year to date as the pipeline kicks back into life after a thin first quarter.

Near record stock markets and strong investor demand for debt are fuelling transactions that had been on hold due to volatility created by the US presidential election late last year.

“Company valuation multiples are elevated given the stock market, but rather than wait to realize growth, companies are willing to buy it through M&A,” said Robert Smock, head of corporate advisory at MUFG.

Both investment-grade and leveraged companies have been on the acquisition trail as a pro-business climate prevails and many are raising loans to back purchases.

US meat processor Tyson Foods is buying packaged sandwich supplier AdvancePierre for an enterprise value of US$4.2bn including the target’s debt, US paint maker PPG Industries raised its bid for Dutch rival Akzo Nobel to US$29bn, Luxembourg-based JAB Holdings agreed to buy Panera Bread for US$7.2bn and German healthcare group Fresenius will acquire US generic drugmaker Akorn for US$4.75bn.

“It feels as though this is a very good time to be selling assets,” said Jeff Cohen, co-head of global leveraged finance capital markets at Credit Suisse. “The credit markets are so constructive right now, and there is a large pool of private equity buyers along with strategic companies having large amounts of cash.”

M&A volume is closely tied to stock market performance and CEO sentiment, Smock noted.

“Given that the stock market is touching records and CEOs are generally constructive on business conditions, I expect continued support for M&A,” he said. “That said, we still must acknowledge the twin dark clouds of being far along into the business cycle, and geopolitical uncertainty.”

Financings for the current batch of deals include a US$15.7bn bridge loan to support the Becton/Bard deal, with Citigroup as the sole lead arranger and bookrunner. Tyson Foods has also secured committed bridge financing from Morgan Stanley for the AdvancePierre deal.

The JAB/Panera financing details are expected shortly, bankers said, and PPG said in a regulatory filing that Goldman Sachs was preparing a full financing package to facilitate its proposed tie-up with Akzo.

RESURGENT M&A

Lending to highly-rated companies is dominating the current round of M&A, which was kick started in early April by US drug distributor Cardinal Health’s US$6.1bn deal to buy Medtronic’s medical supplies units. The bid materialized days after Abbott Laboratories agreed at a lowered US$5.3bn price to its long-awaited purchase of diagnostic testing company Alere.

Becton Dickinson then piled in with the April 24 news of its acquisition of C R Bard, backed by the US$15.7bn bridge loan.

More deals are in the works. This week Cerberus was reported to be considering a bid via grocery store chain Albertsons for Whole Foods Market, which has a market cap of just under US$12bn.

The current pace of M&A is already topping an anemic first three months. Investment-grade companies raised only US$11bn of new money for acquisitions in the first quarter, which is the lowest quarterly volume since the fourth quarter of 2012, according to Thomson Reuters LPC data, but this is set to rise in the second quarter.

“Investment-grade lending tends to follow M&A volumes, and large-scale M&A has taken a relative pause since the elections,” said Jeff Nassof, a director at Freeman Consulting Services. “M&A market fundamentals are still solid though, so it’s possible the Becton Dickinson/Bard deal triggers another wave of deals, and another wave of bridge financings.”

Leveraged M&A has been slow and steady but has lacked the blockbuster deals that investors have been calling for. The US$51.3bn of new money extended for leveraged M&A in the first quarter was the lowest quarterly tally since US$35.6bn in the same quarter four years ago, LPC data shows.

Investors are snapping up the few multi-billion-dollar loans. This week, UK financial software provider Misys, which is buying Canadian fintech company DH Corp, increased a loan package to about US$6.2bn from US$5.7bn after raising the dollar tranche of the dual-currency deal.

Blackstone in April financed its buyout of Aon Hewitt’s technology-enabled benefits and human resources platform Tempo with an increased US$2.7bn loan, after reducing a bond and cutting loan pricing during syndication to 300bp over Libor from a spread of 325bp.

If sponsors can find a way of beating strategic corporate buyers flush with cash, even bigger buyout deals could be done, bankers said.

“I believe in today’s market environment that a US$20bn LBO is very achievable,” Cohen said.

“Around US$10bn-US$15bn of debt financing for a deal in the non investment-grade market would be very well received,” he said. “And after seeing that deal get done, I’m sure investors would ask how quickly is the next one going to come out?” (Reporting by Lynn Adler and Jonathan Schwarzberg; Editing By Tessa Walsh and Jon Methven)