In an effort to ward of accusations of using bailout funds to finance the $68 billion Pfizer (PFE) acquisition of Wyeth (WYE), a Citigroup spokesperson said on Friday that, since the lending consortium plans to sell down the loan to pension funds and money managers, “no TARP funds will be in play at any stage of the deal.” However, given the deal’s structure, there is no way to reasonably ascertain how much of the $22.5 billion one-year bridge loan will appeal to secondary participants by the time the transaction is ready for closing.
The consortium includes Citigroup (C), Bank of America (BAC), Goldman Sachs (GS) and JPMorgan Chase (JPM), all potential rescue targets in the forthcoming Bad Bank package. And there are concerns that adverse market conditions at closing, expected in the second half of this year, may force lenders to carry the Pfizer acquisition facility on their own books, amounting to a use of taxpayer dollars to fund a transaction whose immediate or near-term value-creation potential remains in doubt anyway.
At first glance, the yield (7-9%) for a superior credit (“AAA”) like Pfizer appears to take into account a rapidly deteriorating economic environment. But anybody pricing the bridge loan from the original syndicate will have to consider the potential downgrade of Pfizer’s credit rating, the chaotic nature of the rating-to-yield debt matrix in the foreseeable future and the lack of liquidity implicit on the purchase of a bridge-loan arrangement. In brief, while the bailout candidates will certainly be able to place the loan in the huge secondary market, there is no basis to assume that the placement exercise will be profitable or tidy.
More importantly, placement or otherwise, lawmakers and regulators need to ask themselves two very obvious questions. Could Wall Street banks have been in a position to provide Pfizer with a $22.5 billion commitment if they were not being propped up by taxpayer dollars? And, on a related note, is government backup encouraging an acquisition which will actually result in the shedding of jobs?
Pfizer publicly acknowledges that the combined company will shed 19,500 jobs. Pfizer has a 160-year history of terminating employee contracts, closing labs and shutting down production units after buying out smaller rivals, often without the creation of identifiable shareholder value. The Wyeth acquisition, health-care analysts suggest, is driven more by the eventuality that 38.5% of Pfizer’s 2007 sales will face generic competition by 2013, as an increasing number of patents expire. “With the real prospects of higher debt levels, of dividends being cut in half, and of revenues of the combined company declining by 17%, this is not a deal which has any meaningful inherent value at this juncture,” a merger-arbitrage specialist stated yesterday. “Moreover, the Pfizer-Wyeth deal is showing a 12% arbitrage return, a telling sign that the chances of the deal not going through are surprisingly high.”
That 12% return may be partly due to the fact that many of Wall Street’s significant merger-arbitrage specialists are no longer active. But, that said, the $22.5 billion commitment provided by Citi, BofA, Goldman and JP Morgan has set in motion a chain of events, besides merger arbitrage, whose consequences for the debt underwriting marketplace are highly uncertain. Firstly, Standard & Poor’s has put Pfizer on negative watch. Secondly, Wyeth stands to collect a whopping $4.5 billion in break-up fees, a recent record, if Pfizer’s ratings are cut and the banks don’t lend. Thirdly, if the yield on the bridge loan becomes a standard benchmark, junior credits can expect to pay no less than 12-15% on mezzanine funds—so much for credit flowing through the system at low interest rates. Finally, in their quest to gain fee income (total estimated to be $210 million), banks are willing to commit M&A funds at rates which are below those being paid on preferred instruments issued to the government.
Once again, the argument being presented to the street by syndicate members is that they will finally end up holding only a limited portion of the Pfizer transaction, if at all, on their own books, and that the $22.5 billion commitment should be viewed more as an underwriting facility than a direct loan. But this type of bet on the shape of the future makes sense only when “stand-alone” balance sheets justify the assumption of the associated risks, not when a $2 trillion Bad Bank law is in the works today. In fact, the entire business of underwriting must now be conditioned by rigid capital adequacy ratios on one hand and by measurable pricing methodologies for both debt and equity on the other. Otherwise, history will repeat itself: lucrative fee-income considerations will trump prudence and technical integrity.
Tags: Bad Bank, E, Merger Arbitrage, Pfizer, syndication, Wyeth
