U.S. M&A lending hits early year high with jumbo loans

A flurry of huge US acquisitions is pushing high-grade M&A lending to early year highs as blue-chip firms take advantage of US tax reform and try to fight off the threat of online retail giant Amazon.

Looser US tax rules could produce a record year for M&A deals. About US$120bn of M&A loans have been completed or are in process so far this year, including a record US$100bn loan backing Broadcom’s hostile bid for rival Qualcomm.

This compares with US$203bn of loans completed in 2017, according to Thomson Reuters LPC data.

In a bid to fight off Broadcom, Qualcomm increased its own bid to buy NXP Semiconductors to US$44bn and said that it intended to fund the additional consideration with cash and new debt.

In an eventful week, Broadcom also reduced its bid for Qualcomm to US$117bn from US$121bn, after objecting to Qualcomm’s NXP bid.

Broadcom’s record loan, which has required the biggest-ever bank commitments of more than US$10bn each from some lenders, has been receiving a positive response from lenders undaunted by its size.

“The Broadcom/Qualcomm deal shows that you can raise US$100bn pretty easily, and banks are clamoring to get in,” a senior banker said.

Another jumbo multibillion dollar loan is looming for drugstore operator Walgreens to back its potential purchase of drug distributor AmerisourceBergen to boost its 26% stake. General Mills’ US$8bn acquisition of Blue Buffalo Pet Products is also backed by a bridge loan provided by Goldman Sachs.

“Deals beget deals,” the senior banker said. “To me, the single biggest change is that you’ve got clarity on tax and regulatory rules.”

M&A deals backing Wyndham Worldwide Corp’s purchase of La Quinta Holdings’ hotel operations and Hubbell’s acquisition of Aclara Technologies have already been completed this year.

The swelling pipeline also includes large financings backing the merger of beverage companies Dr Pepper Snapple Group and Keurig Green Mountain as well as Energizer Holdings’ buy of Spectrum Brands’ battery and portable lighting business.

SLOW GOING

M&A activity was muted in 2017 due to uncertainty about whether the Trump administration could push through the biggest overhaul of the US tax system in more than 30 years, but the bill was signed in late December.

The US corporate tax rate was cut to 21% from 35%, which helps to boost profits and better position some companies to pull the trigger on takeovers.

“There was uncertainty around tax at the end of the year, which made it hard to do a large deal, but now that there’s clarity, some of that pent up demand for assets is going to come out,” said another senior banker. “It’s pretty broad-based: healthcare, pharma, tech, industrials.”

Fear of online retailer Amazon is also driving consolidation that is reshaping entire sectors, spurred by the giant retailer’s acquisition of upscale grocer Whole Foods Market last year.

“Amazon comes in and buys Whole Foods, and suddenly all hell breaks loose in grocery retail and everyone has to respond,” the first senior banker said. “There’s now Walgreens with AmerisourceBergen, seeking scale to compete with Amazon, which wants to get into the drug delivery chain. There are ripple effects everywhere.”

CREDIT ‘IN SPADES’

February’s stock market volatility appears to have subsided enough to keep the deal machine active as borrowing costs remain low and the economy gathers pace. Credit is plentiful and liquid banks are eager to lend and rack up related fees.

“The market is there in spades in terms of financing, and banks are beating each other up to participate in these financings,” the first senior banker said.

While some companies are accelerating growth by making acquisitions, others, including General Electric and Honeywell International, will be shedding businesses to streamline and enhance profits.

Those spinoffs will also create demand for loans to support the new entities, helping to boost income earned from arranging the funding.

Lenders of the US$100bn in loans for Broadcom’s proposed purchase of Qualcomm stand to pull in as much as US$300m to US$400m from upfront arrangement fees, according to Freeman Consulting Services.

If the US$31bn bridge-to-bond portion is replaced by bonds, there could be an added US$150m to US$200m earned on underwriting.

If the deal materializes, these tallies alone will surpass fee income of just under US$300m earned by banks on all US investment-grade syndicated lending in last year’s first quarter, Freeman’s data show.
Source: Reuters (Reporting by Lynn Adler; Editing by Tessa Walsh and Michelle Sierra)

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