Integrating for success: Takeda and Shire tackle legacy treasury under tough conditions
Takeda Pharmaceutical acquired Shire for JPY6.2trn (US$62bn) in January 2019, making it the largest acquisition in Japanese history and 8th largest pharma acquisition globally. The combined new Takeda had US$30bn in annual revenues and around 50,000 employees worldwide, making it a global top ten global pharma company.
Legacy Takeda and Shire treasury teams immediately began their integration efforts under the leadership of Amit Singh, who had joined Shire just six months prior to the acquisition announcement. Challenges facing the new treasury team were manifold.
The first was in forming an integrated global team. At the time of the acquisition, a 40-person combined treasury team was spread across four time-zones (US, Dublin, Zurich and Tokyo), with team members representing ten nationalities. Clear communication across cultures and geographies was difficult at a time when it was most needed.
Governance and policies also needed to be harmonised. While there were some similarities across the two legacy treasury policies, approaches to risk management and cash management were quite different. In addition, Takeda, now registered on NYSE, would be subject to US SOX, which was an entirely new process for legacy Takeda colleagues.
The state of IT systems was a concern. Neither treasury team had invested time or effort in treasury automation like a treasury workstation or an FX hedging solution. This had resulted in a patchwork of Excel-driven processes that were difficult to manage, let alone combine smartly. Risk management systems also needed to be looked at, as hedging and risk management activities were reactionary and manual, and counterparty risk policy, not rigorous. For example, legacy Takeda had a practice of leaving large sums of money as bank deposits, not fully taking into account the resulting counterparty and concentration risk in the financial sector.
Furthermore, liquidity and leverage management had to be balanced. Historically, Takeda had been a cash-rich, low-debt Japanese company, where the legacy treasury team had little need to focus on liquidity or leverage issues. As such, there was no ready access to a commercial paper programme, and the size of the revolving credit facility was inadequate for a doubly large, leveraged BBB company that Takeda had now become.
Visibility and pooling of global cash was also identified as a potential area of improvement. Visibility of most of the cash was only on a monthly basis, and while a global cash pooling programme was in place in Japan, it was not being fully utilised. As Takeda focused on deleveraging, it would be necessary to have daily visibility over its global cash. This could only feasibly be achieved by implementing a Treasury Management System (TMS) in combination with a cash concentration programme.
Debt-covenant harmonisation was identified as a concern too. Covenants had not been a discussion topic at legacy Takeda prior to the Shire acquisition. Takeda had been single-A credit-rated and substantially covenant-free. After the acquisition, Takeda treasury inherited a mix of old and new covenants, some of which were not suitable for Takeda’s high leverage levels (for example, debt issued for the Shire acquisition, while technically pari passu with all other unsecured debt Takeda held, did not necessarily have same covenants as historical Takeda bonds and loans). Uncorrected, future covenant management could become challenging.
Intercompany funding and dividend planning, paramount for Takeda in order to concentrate global cash in Japan, were ad-hoc for the two legacy firms. Substantial amounts of cash were frequently left in local markets for long periods, subject to potential devaluation and counterparty risk. Intercompany loans, frequently used as a tool for repatriation by legacy Shire, would no longer be sustainable for Takeda, given controlled foreign company (CFC) rules.
In the first week after acquisition, treasury held a meeting to discuss integration priorities. Sub-teams were formed on various core treasury workstreams, with co-leads from legacy Shire and Takeda placed on each workstream, and the sub-teams collaborated and shared process descriptions and documents.
The first two-month first phase was about sub-team discussions, taking no steps to integrate until each other’s processes were fully understood. In the second two-month phase, integration plans emerged that were subsequently implemented over the following eight months (some are still ongoing). Closely observing team dynamics and individual capabilities allowed Amit Singh, Takeda SVP Group Treasurer, to select his new 28-person treasury team, which was announced in May 2019.
Turning to governance and policy harmonisation, it was appropriate to take the best of both policies, keeping in mind the realities of a leveraged Takeda with its changed risk appetite. Two new global treasury policies were developed, one for the corporate function, and one that would apply to Takeda subsidiaries (or affiliates) in local markets. Both were implemented by September 2019.
Noting the urgency arising from a technology-deficient treasury landscape at Takeda, the team conducted a rapid RFP, selecting Kyriba’s TMS, and Atlas FX for automated hedging. Implementation began on both systems by May 2019, with substantial completion by December 2019.
In terms of finalizing the capital structure of Takeda, Treasury team concluded that it would make sense to raise JPY500bn (c.US$4.5bn) in JPY Hybrid Bonds in addition to issuing regular straight bonds in USD and EUR to fund the US$30bn cash consideration for the Shire acquisition. Shire financing, which included US$5.5bn of USD bonds and €7.5bn of EUR notes had been successfully completed in November 2018 and was supplemented with US$7.5bn bank term loans and sizeable JBIC (Japan Bank for International Cooperation) lending. Takeda’s JPY500bn (US$4.5bn) Hybrid Bond transaction in May 2019 was widely applauded to be transformational for the Japan market, and as a result won the 2019 Deal of the Year award from Nikkei Veritas in the Bond category for institutional investors.
New commercial paper programme in Japan, initiated in February 2019 by treasury operations team, gave a solid boost to Takeda’s access to liquidity which was further enhanced by a refinanced US$6.5bn RCF in October 2019. Team developed a detailed cash flow forecast model (by May 2019) to help track monthly changes in leverage levels (a metric that was being closely monitored by the CFO and the investors).
When the cash module in Kyriba went live in December 2019, daily global cash visibility jumped overnight to 80%+. Weekly visibility is now 95%, with some local market balances still being tracked outside of Kyriba and updated weekly/monthly. A second wave of SWIFT connectivity in 2020 should bring more banks online, with daily visibility expected to climb.
Treasury’s subsidiary policy of maintaining minimal cash in local markets has allowed more cash to be concentrated in treasury centres, and hence become accessible for deleveraging. In Japan, for example, pooled cash went up by over US$100m as a result of the implementation of this policy. Cash centralisation also facilitated a reduction in counterparty exposure, with increased concentration into MMFs (many of which were integrated directly into the cash-pool’s end-of-day balance position).
Atlas FX went live in December 2019, enabling the team to hedge global FX exposures from a single legal entity, allocating internal ‘mirror hedges’ to the entities holding the exposure. On counterparty risk exposure, the risk management team put together a risk-tracking programme, which began tracking counterparty risks in September 2019 on a daily basis, adopting the banking industry’s Basel III credit-risk framework.
Meanwhile, the capital markets team spent three months in one-to-one negotiations with over 50 of Takeda’s lenders (both global and small regional Japanese banks). Their remit was to harmonise all covenants across all debt-stacks. This exercise was concluded in December 2019 and announced publicly by Takeda in its fiscal year 2019 Q3 earnings release (and by S&P in its February 2020 report on Takeda).