Finding a way
Pfizer’s financing for the purchase of drugmaker Seagen in May was the biggest in the investment-grade market in 2023. But the deal particularly stood out for the deft navigation of a difficult antirust environment.
Large M&A bond offerings have several factors which count in their favour. Their well-telegraphed nature means investors have set aside cash to deploy, their size helps them qualify for corporate bond indices and their generous concessions help generate the demand necessary to ensure execution.
For those reasons, market participants were confident Pfizer was easily headed for success in the days before the transaction’s launch. Then, the US Federal Trade Commission threw a curveball.
On the night before the planned financing, news broke that the antitrust regulator had sued to block Amgen's nearly US$28bn purchase of drugmaker Horizon Therapeutics, which was backed by a large bond transaction issued earlier in February.
The similarities between Amgen and Pfizer raised concerns that Pfizer too could see a challenge from the FTC, leaving bankers and the issuer scrambling for ways to ease investor nerves.
“The proximity of the timing of the Amgen news made for an emotional response from the investors,” said Jonny Fine, Goldman Sachs’ head of US investment-grade syndicate.
Investors wanted to contest the special mandatory redemption provisions which are boilerplate for M&A-related bonds. Such language came under intense scrutiny in 2023 amid uncertainty around interest rates and an antitrust regulator willing to swing its weight to block mergers.
In a scenario where Treasury yields fell, Pfizer’s new longer-term notes would rally sharply. But if the company failed to get approval for the acquisition, investor gains would evaporate because the issuer could redeem the bonds at the standard 101 cents on the dollar.
So Pfizer’s bankers came up with a solution that would be talked about by Wall Street for months to come.
The pharmaceutical company sold two of the tranches with the SMR language at a rare discount, while excluding the covenant for the 10 and 30-year maturities. The alternative options could have been more costly, such as selling the bonds at wider spreads.
Pfizer’s CFO Dave Denton was behind a similar strategy with CVS Health’s M&A bond in 2018 when he served at the pharmacy chain as CFO.
In the end, the issuer’s flexibility was rewarded with an US$80bn order book, helping it to print the fourth-largest US investment-grade bond ever. Active bookrunners were Bank of America, Citigroup, Goldman Sachs and JP Morgan.
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