€ 1 Billion, Part II: The “Simplest Way” — To Return Euro-Earnings To USA, In A Tax Efficient Manner

Last night, we mentioned Merck’s new €1 billion unsecured debt issuance (full term sheet now on file, at the SEC). Now let’s discuss the most likely primary animating reason for it.

It is a simple strategy, really: Kenilworth has lots of local US debt — commercial paper and other unsecured obligations. With the $1.087 billion in proceeds in Europe, Merck will simply pay off the US debts, and thereby conserve both US earnings power, and cash flow — without paying any tax on the return. That’s a very simple “old school” way multinationals handle high finance. It works nicely, because under US law, cash is generally. . . fungible. Sweet.

And I think it is a fine capital allocation move. In the event that such returns are, in the future, subject to new or different US taxes, Merck may simply prepay the Notes — without premium or penalty. Nice. From the prospectus (page S-17), then:

. . . .Taxation Redemption

The notes may be redeemed at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, together with interest accrued and unpaid to the date fixed for redemption, at any time, on giving not less than 30 nor more than 60 days’ notice in accordance with “Notices” below if:

(a) we have or will become obligated to pay Additional Amounts as a result of (i) any change in or amendment to the laws, regulations or rulings of the United States or any political subdivision or any taxing authority of or in the United States affecting taxation, or (ii) any change in or amendment to an official application, interpretation, administration or enforcement of such laws, regulations or rulings, which change or amendment is announced or becomes effective on or after the date of this Prospectus Supplement; provided we reasonably determine that such obligation cannot be avoided by our taking reasonable measures available to us without significant difficulty, cost or expense, or

(b) any action shall have been taken by a taxing authority, or any action has been brought in a court of competent jurisdiction, in the United States or any political subdivision or taxing authority of or in the United States, including any of those actions specified in (a) above, whether or not such action was taken or brought with respect to us, or any change, clarification, amendment, application or interpretation of such laws, regulations or rulings shall be officially proposed, in any such case on or after the date of this Prospectus Supplement, which results in a substantial likelihood that we will be required to pay Additional Amounts on the next interest payment date.

However, no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which we would be, in the case of a redemption for the reasons specified in (a) above, or there would be a substantial likelihood that we would be, in the case of a redemption for the reasons specified in (b) above, obligated to pay such Additional Amounts if a payment in respect of the notes were then due and, at the time such notification of redemption is given, such circumstance remains in effect.
Prior to the publication of any notice of redemption pursuant to this section, in the case of a redemption for the reasons specified in (a) or (b) above, we will deliver to the trustee:

(1) a certificate signed by one of our duly authorized officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right so to redeem have occurred, and

(2) a written opinion of independent legal counsel of recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of such change or amendment or that there is a substantial likelihood that we will be required to pay such Additional Amounts as a result of such action or proposed change, clarification, amendment, application or interpretation, as the case may be. . . .

So. . . that’s the easy way — in a nutshell — to soak up some excess non-US cash flow: pay off US debt with low coupon €-denominated debt. And there you have it. Walking in — with the Cubs poised to make history in the friendly confines this weekend. That’s a huge grin!

नमस्ते

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