Chemical Bank is marketing a $500 million loan to help Burlington Northern raise its acquisition bid for Santa Fe Pacific Corp.
The loan, the subject of a bank meeting expected in the next week, is the third major deal to hit the loan syndication market in the heated bidding war for Santa Fe.
Union Pacific has arranged a $2 billion loan for its bid, led by Citibank, NationsBank, and Credit Suisse. Santa Fe has a separate $1.56 billion loan for a repurchase program from five banks led by J.P. Morgan & Co.
Burlington will use this latest facility to purchase 13% of Santa Fe's outstanding shares at $20 per share, following a previously announced agreement under which the two companies would acquire up to 30% of SantaFe's outstanding shares.
The bank-supported stock purchase gives Burlington a toe-hold in Santa Fe even as it gives Santa Fe some cash. And analysts say it could mark a significant development in the bidding war.
Burlington is demonstrating its commitment to Santa Fe not only by raising its bid, but also by enlisting financial assistance from bank loan syndicators for the first time.
Santa Fe will use half of a new $1.56 billion facility to purchase stock and the rest to refinance existing debt. J.P. Morgan, Chemical, Chase Manhattan, Union Bank of Switzerland, and Goldman Sachs & Co., are leading this facility. A bank meeting is also expected for this loan in the next week.
J.P. Morgan is the administrative agent, and is committing $360 million to the multi-tranche deal, while the others are committing $300 million.
Regardless of the outcome, a large number of banks will be a part of the winning bid. Several banks, including Chase and Chemical, have lined up behind both multibillion-dollar facilities. "It's not uncommon to see this," said one observer. "The banks have just kept their two loans separate."
Of the three loans, only the Union Pacific facility is contingent on the merger. If Burlington Northern acquires Santa Fe, the banks that have arranged and placed the transaction will receive a fee, while those that signed on to the transaction will receive a "ticking fee," which provides compensation for time they committed to the facility.
Although Santa Fe's most recent arrangement with Burlington Northern represents a serious challenge to Union Pacific - including a $50 million breakup fee - several industry followers think this contest is far from over.
"The only thing this recent activity does is raise the bar over which Union Pacific has to go (to acquire Santa Fe)," said Scott Flower, an equity analyst at PaineWebber Inc. "There is nothing per se that is a tremendous impediment to Union Pacific."
The availability of additional money from the banking community is certainly not at issue.
Sources involved in the Union Pacific facility are confident that the bank market is prepared to support a higher bid. In the $2 billion loan syndication, several banks had their commitments reduced from $200 million to $85 million.
Shortly after the announced agreement between Santa Fe and Burlington Northern, Santa Fe chairman Robert Krebs urged Union Pacific to improve its bid without delay.
Two weeks later, however, Union Pacific has not come back with a counteroffer. Sources close to the deal have not heard anything from Union Pacific recently, but said they wouldn't be surprised if Union Pacific came back with another offer soon. Union Pacific's current tender offer expires at midnight on January 19.
Santa Fe and Burlington both have shareholder meetings scheduled for Jan. 27 to vote on the new agreement.
One source close to the deal believes that Santa Fe arranged this new financing to avoid being put in the same position as Kemper Corp. and Conseco Inc. "It's difficult for a board to accept a deal without complete financing," said the source.
In addition to shareholder approval, a successful deal requires acceptance by the Interstate Commerce Commission. In that arena, Union Pacific has a regulatory edge over Burlington because it had established a voting trust.
If Burlington Northern wins both regulatory approval and its attempted acquisition, it will swap 0.4 share of its stock for the remaining outstanding shares of Santa Fe.
The new $500 million Chemical-led loan is a five year revolver that will be syndicated to existing Burlington Northern relationship banks.