Rocky market causes even marquee deals to limp
PHILADELPHIA (Reuters) - Even marquee mergers of large companies with famous brand names have become more difficult and costly to close as the credit markets essentially remain frozen amid the global financial crisis.
Two of the biggest deals yet to close -- the $52 billion takeover of U.S. brewer Anheuser-Busch and the $32.5 billion takeover of Canadian telephone company BCE Inc (BCE.TO) -- remain on track to close by year-end, but final funding costs could be higher than initially estimated, traders said.
"People are worried about almost every deal out there," said Andy Baker, special situations trading strategist for Jefferies & Co Inc.
"When you have people worried about marquee names like Altria buying UST, the biggest smokeless tobacco company, or InBev and BUD (Anheuser-Busch) -- tobacco and beer, products that are nearly recession-proof -- you know banks are hesitant to take on even the smallest risk," Baker said.
InBev INTB.BR last week postponed its $13.4 billion rights issue to complete the takeover of Anheuser-Busch (BUD.N), but reiterated it still planned to close the purchase of the U.S. brewer by year-end.
InBev has committed financing to acquire Anheuser-Busch, but the second round of loan syndication has been going more slowly in recent weeks due to the global financial crisis, sources told Reuters.
Lenders signed up for the first round of funding in August, but financing costs were more than originally expected since the debt carried one of the highest interest margins ever seen on an investment-grade loan, sources previously said.
Syndicating the second round of funding has been more difficult -- and potentially more costly -- since the banks have fewer buyers for the debt since few lenders are willing to absorb more loans, traders said.
"For BUD (Anheuser-Busch) and BCE, the extra costs are merely incremental to the overall cost of the deal," said one arbitrageur who declined to be named. "It's smaller deals where extra funding costs can make a big difference in whether a deal is profitable or not."
For example, HLTH Corp HLTH.O said on Monday it terminated a deal to merge into its unit, WebMD Health Corp (WBMD.O), citing the debt load that the new company would be saddled with in a deteriorating credit market.
HLTH also said the sale of another unit, Porex, was delayed as a potential buyer had difficulty arranging financing.
WEIGHING THE SPREADS
Arbitrage spreads, which measure the difference between the offered takeover price and the target company's current trading price, have remained wide even on deals with Blue Chip names and committed funding. Historically, the wider the spread, the more investors doubt a deal will close.
On Monday, the spread for the InBev and Anheuser-Busch deal stood at almost 17 percent, Bank of America Corp's (BAC.N) planned purchase of Merrill Lynch MER.N at almost 13.6 percent, and Dow Chemical's (DOW.N) plan to buy Rohm & Haas ROH.N at 11 percent, according to Reuters data.
Dow Chemical's funding plan includes an equity investment by billionaire Warren Buffett's Berkshire Hathaway (BRKa.N) and the Kuwait Investment Authority. It also has secured $13 billion debt financing from Citigroup (C.N), Merrill Lynch and Morgan Stanley (MS.N).
"Is Warren (Buffett) walking away from the Rohm & Haas financing? I don't think so. But people worry about everything right now," said a second arbitrageur who declined to be named since he was not authorized to speak with the media.
Altria Group Inc (MO.N) said last week it would hold off on closing its $10.4 billion purchase of UST Inc UST.N until early January because its lenders advised that it would be better to close the deal in 2009.
Altria said it has fully committed financing to complete the transaction. JPMorgan Chase (JPM.N) and Goldman Sachs (GS.N) previously committed to provide up to $7 billion in bridge loan financing for the deal.
"Altria was an to the banks, not a sign of dire trouble," said the second arbitrageur.
The spread on the Altria-UST deal hovered at 7.6 percent on Monday.
Traders agreed that the biggest merger uncertainty hovering over the market is the takeover of BCE, the parent of Canada's biggest phone company, by a consortium. That deal is slated to close by December 11.
"Funding for a more than $30 billion deal was agreed to in a bull market, but will the banks stand by those commitments? It's been radio silence for a few months," Baker said. "It would be difficult and complicated to get out of the deal, but people still have concerns about a deal of this size."
The worries spring from wreckage of other private equity deal failures, including the proposed takeovers of audio equipment maker Harman International Industries Inc (HAR.N), equipment renter United Rentals Inc (URI.N) and student lender Sallie Mae, formally known as SLM Corp SLM.N.
(Additional reporting by Tessa Walsh in London, editing by Matthew Lewis)
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