It is time for “The M&A Daily” and we have what might normally appear as a red flag alert here today. Yesterday’s news that Sanofi-Aventis SA (NYSE: SNY) was borrowing $7 billion via debt sales may create at least a small pause when it comes to thinking about the ease of making acquisitions the size of Genzyme Corporation (NASDAQ: GENZ).
The reality is that the company may actually deserve a pat on the back rather than criticism. Sanofi sold 1-year, 2-year, and 3-year floating rate notes and fixed maturity notes due in 3-years, 5-years, and 10-years.
While we were not expecting the full $20+ billion to come straight from the Sanofi-Aventis cash coffers, this is still more debt assumption than we were expecting ahead of time.
It is possible that Sanofi-Aventis just realizes now that it is more than likely to have to pay up this milestone earn out (contingent value rights) that could get the total price closer to $80 per share based upon milestone achievements rather than just the $74 stated cash buyout price per share.
Perhaps another reason the debt sale was this large is that investors have a demand for non-government paper. We do not view the Sanofi-Aventis debt offering as anything that would send up red flags on its finances. At the tight spreads it was able to borrow funds, it may even just be corporate prudence. If you can borrow for an average of 3% and make somewhere around 20% return on capital then you would in theory be foolish not to borrow as much as they will give you. Call it the “Biotech Carry Trade.”
If other drug giants can borrow billions of capital for this cheap, more large biotech giants might fall prey to M&A predators.
JON C. OGG