Markets signal approval of Sanofi's Genzyme tilt

LONDON/PARIS, Sept 9 Thu Sep 9, 2010 11:35am EDT

LONDON/PARIS, Sept 9 (Reuters) - Chris Viehbacher's tilt at Genzyme Corp GENZ.O, the maker of drugs for rare diseases, has boosted Sanofi-Aventis SA's (SASY.PA) shares, sparked broker upgrades and is backed by very cheap debt.

A stock rally since the Sanofi chief executive made his approach public has added about 3.8 billion euros ($4.8 billion) to Sanofi's value -- a sharp contrast to the billions wiped off the market capitalisation of other acquisitive companies recently, including BHP Billiton (BHP.AX) (BLT.L).

And it has also narrowed a big underperformance this year by the French drugmaker compared with its peers -- a lag driven by worries about how it will cope with a swathe of its biggest drugs going off-patent.

Viehbacher made public a $69-a share, or $18.5 billion, offer on Aug. 29, which Genzyme rejects as too low. [IDnLDE68816Z]

Since then, Sanofi shares have risen about 6.5 percent to 48.20 euros, outperforming a 4 percent rise in the DJ Stoxx European healthcare index .SXDP. The stock is now little changed from July 2, when sources first said Sanofi was looking at several U.S. acquisitions.

Citigroup, Evolution Securities, and Societe Generale, one of Sanofi's financiers, have all lifted their ratings since Aug. 29.

And Starmine, which averages analyst recommendations on a scale ranging from 1 ("strong buy") to 5 ("strong sell"), says the 40-or-so Sanofi analysts it tracks now have an average recommendation of 2.08 -- close to a "buy" -- up from 2.38 three months ago.

Claude Allary, a managing partner at consultant group Bionest Partners in Paris, said the share reaction "reflects some sort of recognition and approval that Sanofi has made a carefully crafted move in getting Genzyme and that things are moving ahead as planned."

LOAN AND BOND MARKETS

Underpinning the Sanofi move is access to super-cheap debt, with benchmark interest rates at rock-bottom.

BHP Billiton, which has slightly lower credit ratings, recently lined up $45 billion of loans to back its bid for PotashCorp (POT.TO), with $25 billion in one-year loans that pay less than 1 percent: a 70 basis point spread above U.S. dollar Libor, currently below 0.3 percent USD3MFSR=. [ID:nLDE67J145]

Sanofi Chief Financial Officer Jerome Contamine told investors on Aug. 30 its borrowing conditions compared "very favourably" against other large takeover financings of the last 18 months.

BNP Paribas, JPMorgan and SocGen have committed to finance a deal. This would typically be done with a mixture of shorter and longer-term loans, with perhaps half in one-year "bridge loans" intended to be quickly refinanced in the bond markets.

Evolution analysts assume a 3.5 percent cost of debt, which they say "looks conservative" -- Sanofi's 2016 euro bonds are yielding just 2.475 percent FR042803774= -- but even this would mean a 14 percent boost to 2013 earnings, assuming a raised deal goes through at $75 a share.

The credit markets are not entirely carefree, but have stopped a long way short of outright revolt, despite the prospect of a deal that will more than treble Sanofi's debt burden.

Standard & Poor's has warned it could cut its AA- credit rating one notch, bringing it line with Moody's.

And the cost of insuring Sanofi's debt against default has roughly doubled from its year-low in April, to about 84 basis points, Markit data shows -- higher than that of rivals such as Roche and Pfizer that have similar credit ratings.

For a Breakingviews column, "M&A buyers get little benefit of the doubt", click [ID:nN26190902] (Editing by David Cowell)

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