Pfieth-Wyzer and the Credit Markets

January 28th, 2009 | Sources: Wall Street Journal


Pfizer’s $68 billion Wyeth buy must mean the credit spigots have cracked open, deal financing is back and it’s the dawn of the next golden era of M & A, right?

Uh, no. Look at the terms. Pfizer announced it plans to pay for Wyeth using a $22.5 billion loan it negotiated with a 5-bank syndicate, along with equal amounts of stock and cash.

The New York-based drug company, considered to be one of the private sector’s best credit risks and a proud owner of investment-grade credit rating, “agreed to pay 7% to 9% on the loans, which come due in one year,” according to the Wall Street Journal.

Not only that according to WSJ, the syndicate–which includes BoA Merrill Lynch, Barclays, Citigroup, Goldman Sachs and  J.P. Morgan Chase can walk if Pfizer’s “credit rating drops below certain thresholds.”

Right on cue, Standard & Poor’s announced it placed Pfizer’s triple-A credit rating on the docket for a downgrade the moment Pfizer announced the deal.

S&P will likely lower Pfizer’s rating to double-A if the deal goes forward due to added leverage and various business challenges faced by the merged entity.

Meanwhile Wyeth’s S&P rating is single-A-plus, just one peg above the minimum required by Pfizer’s deal with the syndicate.

In effect, Wyeth has cast its fate to the ratings agencies. “We realized there’s a new world out there,” a Wyeth insider told WSJ. “You can’t get blood from a stone.”

Then again, Wyeth stands to receive $4.5 billion in break-up fees, twice the usual amount, if Pfizer can’t secure the bank loan.

At the end of its one-year bank loan by the way, Pfizer plans to refinance the $22.5 billion by issuing bonds. Good luck on that.


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