This solution illustrates the immense importance of long-term relationship building and trust across a broad array of relationships; particularly when the transaction relates to the largest corporate acquisition financing in Europe since the financial crisis of 2008 and the largest M&A transaction in Merck’s history.
Photo of Christof Mürb, Deutsche Bank, Rando Bruns and Tim Nielsen, Merck and Marc Voelcker, J.P. Morgan.
Merck is a leading company for innovative and top-quality high-tech products in healthcare, life science and performance materials. The company generated sales of €11.3bn in 2014 with 39,000 employees in 66 countries. Merck is the world’s oldest pharmaceutical and chemical company – since 1668, the company has stood for innovation, business success and responsible entrepreneurship. Holding an approximately 70% interest, the founding family remains the majority owner of the company to this day.
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On 22nd September 2014, Merck KGaA entered into a $15.6bn dual currency loan facility – which is the largest corporate acquisition financing in Europe since the financial crisis in 2008 – to support its acquisition of US-based Sigma-Aldrich. The treasury department wanted to strengthen the relationship with all of the company’s 19 relationship banks, which are defined by participation in the €2bn revolving credit backup facility.
It was Merck’s goal to have all relationship banks participate in the financing in order to further strengthen all their relationships, while at the same time avoid any elbow-mentality and competition among banks for certain financing roles. A financing strategy was developed to have a fair distribution of earnings and name recognition among the banking group.
It also ensured Merck had a highly transparent syndication and take out financing process at all times. The roles for each bank in the acquisition financing as well as the take out financings were determined by Merck prior to announcement and signing of the credit facility.
Rando Bruns, Group Treasurer at Merck recalls: “we were able to do so as we had arranged regular market updates and hypothetical pitches by our banks in the 12 months prior to the acquisition financing and had a very good understanding of bank’s capabilities.”
All 19 relationship banks participated in the acquisition financing. For the syndication process – which was driven by Merck – the same structure as in the €2bn RCF backup facility was applied. That is, 17 mandated lead arranger (MLA) and two lead arrangers (LA). All 17 MLA’s were invited to participate in the bond take out financings as a book runner, providing equal credits for league table purposes.
Internally, a differentiation is being made between active and passive book runners with 11 banks having an active book runner role in one of the take out transactions and a passive book runner role in the other take out transactions.
The total fee volume is then allocated according to the bank groups: original underwriter, active book runner or passive book runner only. Within a group, all banks will receive the same earnings –independent of the type of bond or volume, for instance, that they are participating in. Take out fees were sized in a way that also the passive only banks receive considerable fees that more than compensates for any losses on their revolving credit facility (RCF) commitment, reducing the fee share for the other banks.
“The structuring of the overall financing package led to more commitments received than we even asked for, resulting in a substantial downsizing of commitments,” says Bruns.
Best practice and innovation:
The financing strategy developed was based on three principles: a broad and fair distribution of earnings among banks, equal treatment league table credits and a transparent process regarding roles of banks. As Bruns explains: “All banks were happy with their role in the financing and relationship managers were not under internal pressure to explain their own position compared to other banks. This is something outstanding and rarely achievable. This is best practice in long-term relationship building and trust.”
This is what two lead banks had to say:
“Overall, the Sigma Aldrich transaction showed the experience of the entire Merck treasury team in dealing with all stakeholders in the acquisition including its employees, public shareholders, the ratings agencies, bondholders and its relationship banks.” – Matthias Reschke, Head of Investment Grade Finance for Germany and Austria, J.P. Morgan.
“Merck convinces with excellent relationship management towards the market and their banking partners; they focus on long-term and sustainable relationships and trust.” – Christof Muerb, Managing Director – Corporate Banking & Securities, Deutsche Bank.
Long-term relationship building and trust.
Day-to-day treasury operations could continue undisrupted as all banks followed the request to postpone contact (any deal related proposals, for example) until their meeting.