Following five attempts at securing a deal to buy UK drugs group Shire, the pharma group’s board has finally agreed an offer from Japanese group Takeda. But is there too much debt in the deal?
Investors are quite rightly concerned over debt-fuelled acquisitions, as history is littered with companies that have got into trouble following such deals. Rio Tinto’s takeover of Alcan in 2007 immediately comes to mind. This has been the issue for Shire’s board in its series of rejections of Takeda’s overtures.
Takeda is proposing a cash-and-shares deal that will leave current Shire investors owning half of the enlarged entity. Takeda is offering about £46bn, the equivalent of £49 a share, including £27.26 in equity and £21.75 in cash. The cash element was raised from the original £17.75 a share. That’s a 60% premium to Shire’s closing price on 27 March 2018, the day before Takeda disclosed its takeover interest. If it does complete the deal would be the largest overseas acquisition ever made by a Japanese company.
Takeda’s shares slumped around 7% overnight in Tokyo following the latest news. Investors there are concerned about UK investors dumping shares in the business once the transaction completes and the level of debt the new group will have on its balance sheet. Indeed, last night credit ratings agency Moody’s said that Takeda’s latest proposal would place even greater downward pressure on the Japanese group’s A1 credit ratings.
"This huge acquisition bodes a spike in leverage that could result in a multi-notch downgrade," Moody's Analyst Yukiko Asanuma said. Such a move would increase the new businesses cost of borrowing.
If the purchase proceeds as proposed, Moody’s noted that Takeda's reported debt will increase to around 6 trillion yen (£39.4bn) from approximately 1 trillion yen. This is due to potential acquisition debt of about 3 trillion yen for the cash portion of the consideration plus the consolidation of Shire's debt of approximately 2 trillion yen. Essentially, the group ratio of debt to operating profits would double.
The deal would propel Takeda into the world’s largest pharmaceutical companies, plus bring new product development into its pipeline. Shire expected to see good growth from next year onwards in its attractive rare-disease and immunology franchises.
The ball is now in the court of Shire shareholders, but the fall in Takeda’s share price is significant. This directly impacts the value of the offer as such a significant amount of the deal is in shares. If its shares fall much further, the chances of the deal failing would increase.
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