Photo of Helen Kyle, SAP SE.
In eight weeks SAP set up the leanest acquisition finance arrangement ever put in place with a full exclusion of syndication. No separate FX hedging for a consideration of US$2.4bn, an excellent timing of the issuance and an extraordinary outcome regarding execution, investor demand and final pricing made this acquisition finance a real success.
Head of Treasury Finance
SAP is the world leader in enterprise applications in terms of software and software-related service revenue. Based on market capitalisation, it is the world’s third largest independent software manufacturer and the most valuable company in the DAX 30.
Fast, lean and cost-effective funding and hedging solution
More than three years after its last major acquisition, on 30th January 2018 SAP announced its intention to acquire CallidusCloud.
The deal was to be worth approximately US$2.4bn and to take place in an environment where threats around rising interest rates and ongoing geopolitical uncertainties were abundant. The main objectives of the treasury team were, therefore, executing financing and hedging activities in a fast, lean and cost-efficient way to ensure a smooth financing and closing of the acquisition.
As was the case with previous acquisitions, the first step for SAP was to negotiate a credit facility to safeguard the overall financing. To promote a fast replacement and reduction of fees, €1.8bn was arranged as a 100% bridge facility.
The company then looked to raise money through bonds and subject to various economic parameters – total purchase price, current maturity profile, currency profile of expected future cash flows and achievable coupons – there was a clear preference for the Eurobond market. The take-out in a single transaction was envisaged for the beginning of March, since this is usually a relatively calm period on the Eurobond market, with limited competing supply – and potentially positive implications for investor demand and coupons.
However, since a new prospectus had to be prepared based on SAP’s 2017 Annual Report, which was not published until 28th February, this made SAP’s timetable quite ambitious. Nevertheless, the company succeeded and the prospectus was approved by the CSSF on a “free of comments” basis a couple of days after disclosure.
A target volume of €1.5bn was defined to be issued within a one-day execution and clear tranches as to maturities and coupons: three years, eight years fixed, and 12 years fixed. This structure attracted different kinds of investors, gave a very strong signal to the market regarding the final volume and resulted in very high price tension.
Since the transaction was in USD but the financing was in euros, the purchase price was hedged. However, it was not hedged separately, but via an existing hedge within SAP. A past intercompany transaction resulted in a significant USD payable for SAP SE towards an entity with USD as its functional currency. Therefore, SAP SE hedged the balance sheet exposure externally by purchasing USD forward with maturity on 13th March.
When the bonds were priced on 7th March, settlement was fixed at T+4 to have the euro funds available when the existing forward contract matured. The purchased USD were used to settle the intercompany payable and were invested externally by the receiving company. Finally, when the acquisition was completed on 5th April, the company distributed a USD dividend to SAP SE, which in turn made a capital injection to the acquiring entity in the US.
Best practice and innovation
SAP only approaches the capital markets in cases where there are specific funding requirements – traditionally caused by acquisitions. It took just eight weeks from receiving the first draft of the bridge facility agreement to pricing the Eurobonds, even though a completely new prospectus had to be prepared, as SAP does not have an EMTN programme.
It was the leanest acquisition finance ever put in place with a full exclusion of syndication. No separate FX hedging for a consideration of US$2.4bn, an excellent timing of the issuance and an extraordinary outcome regarding execution, investor demand and final pricing made this acquisition finance a real success.
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100% bridge facility with full refinancing prior to close.
No syndication of the €1.8bn bridge facility but a straight take-out transaction.
Incorporation of M&A call at 101%, pricing based on “free of comments” prospectus.
Lowest spread for any public three years corporate issuance for at least the last ten years.
Excellent timing of the transaction.
No separate USD hedging as existing intercompany structure was used.
Key learning points
It is essential to stay curious and flexible with regards to well-established structures and processes that have proven successful in the past. Early alignment with internal and external stakeholders in a trustful relationship is of utmost importance to derive the strategy and detect improvements. Once the strategy has been decided, it is time to stop discussions and focus on execution.