This morning, Merck announced what is essentially a debt swap — buying back some of its higher coupon (around 6.3 per cent) debt, which will be replaced by an equal amount of new debt, which is indicated to price at around the relevant Treasury obligations (3 per cent), plus about 50 to 90 basis points, to reflect the increased default risk Merck presents, compared to the US Government’s risk of default. Got it? Good. Simple finance.
That is sensible, and expected, as the outstanding (since 2009) Merck euro coupon debt is now unduly expensive, compared to presently prevailing interest rates (as I said above — they are lower now, than they were back then). Very plain vanilla finance strategy is at work here.
What I enjoy, however, is “the story behind the story“. Note that DeutscheBank, back in August (see my graphic at right, from August 2014) “jumped the couch” when it placed an equity price target on Merck — at $65. That was a full two bucks over all others. What’s a couple of bucks, you might ask? Well Merck has 2.88 billion shares outstanding, so that is. . . $5.8 billion, in implied increased enterprise value. And, such a couch jumping prediction (especially by a major house, on a Fortune 100 company) is — more than occasionally — a self fufilling prophecy. Note here that Guggenheim joined DeutscheBank — just this past week, at the $65 target level. And since August, Merck has more or less risen steadily, from $56.80 to around $59 or $60 (occasionally to $61).
AND. . . SO, in a very real sense, the tout/analyst side of the Deutsche house was scratching Merck’s back, in August. Now here in the first full week of October, the “debt side” of the Deutsche house will reap commissions on over $4.7 billion of new debt sales, for Whitehouse Station. Su–w-w-w-e-e-e-e-e-e-t. That could well be a $15 to $30 million payday, with all the resultant stabilizing trades — and hedging activities, all in. Here’s the plain vanilla press release, from Whitehouse Station this morning:
. . . .Merck. . . announced today the commencement of a public offering of three series of Euro denominated senior unsecured notes due 2021, 2026 and 2034 (collectively, the “New Notes”). The exact terms and timing of the offering will depend upon market conditions and other factors.
The Company intends to use all or a substantial portion of the net proceeds from the offering of the New Notes to purchase notes and debentures that are validly tendered in connection with tender offers launched by the Company for its 6.30% Debentures due 2026, 6.40% Debentures due 2028, 5.95% Debentures due 2028, 6.50% Senior Notes due 2033, 5.75% Notes due 2036, 5.76% Notes due 2037, 6.55% Senior Notes due 2037, and 5.85% Notes due 2039 (collectively, the “Old Notes”). As of the date of the Offer to Purchase, the aggregate outstanding principal amount of the Old Notes is approximately $4.76 billion. If there are net proceeds remaining after the tender offers, the Company intends to redeem in whole or in part, its 4.00% Notes due 2015 and 6.00% Senior Notes due 2017. Any remaining net proceeds will be used for general corporate purposes. . . .
And who is a co-lead underwriter on this deal? Deutsche. Hilarious. To be clear, I am certain that the Deutsche stock analysts are complying with their various SEC Reg AC duties. That is, they genuinely believe in the analysis they made (and the price target they set for the name), back in August. But it had an incidental benefit, here for the debt side of the house — exactly as I said it might.