J.P. Morgan and Citicorp are among the nine banks lending $1.43 billion apiece to support Glaxo Holding's bid for Wellcome PLC.
The British giant, bidding to surpass Merck & Co. as the world's largest pharmaceutical company, offered $14.1 billion for Wellcome last week. With options, the deal could be valued as high as $14.9 billion.
Wellcome, maker of the anti-AIDS drug AZT and the anti-herpes drug Zovirax, rebuffed the bid as too low and advised its shareholders not to accept.
Glaxo's purchase of Wellcome would be the largest bank-financed pharmaceutical acquisition in history and the third multibillion-dollar pharmaceutical merger since September.
American Home Products took out a $10 billion loan led by Chemical Bank when buying American Cyanamid in September. Eli Lilly & Co. purchased PCS Health Systems in October with a $4 billion facility led by Citicorp and Chemical Bank.
Glaxo's bid is supported by more than $12.87 billion worth of loans from nine banks. In addition to J.P. Morgan and Citicorp, Glaxo has lined up Natwest Capital Markets, Credit Suisse, Dai-Ichi Kangyo Bank, Deutsche Bank, Midland Bank, Swiss Bank Corp., and Union Bank of Switzerland.
Each bank has agreed to provide $1.43 billion through a bilateral agreement with Glaxo, in which each bank deals directly with the company. Typically, companies seeking total financing on this scale approach a bank or a few banks to serve as syndicating agents, who then seek commitments from the bank community.
"We haven't seen that many instances where a borrower goes out and taps nine banks for an acquisition," said Steve Miller, vice president at Loan Pricing Corp.
If Glaxo succeeds in acquiring Wellcome, market sources expect Midland - and possibly Natwest - to lead a syndication of the loan. At that point, the banks will be able to reduce their sizable commitments.
The price for the three-year facility is estimated at the London interbank offered rate plus approximately 20 basis points.
Market sources expect that bankers will be as eager to join this investment grade facility as they were to join last year's oversubscribed $10 billion American Home Products loan.
The diminishing prospect of health care reform in the United States has not slowed pharmaceutical consolidation. "Certainly the accelerator has been pressed as companies are worried that they'll be left behind," said Charles K. Brown, an analyst at Goldman, Sachs & Co. in London.
The financial appeal of cost consolidation is great in an industry in which regulations have kept revenues from rising.
The expiration in the next few years of Glaxo's global patents on the ulcer-fighting drug Zantac pushed the cash-rich company into the acquisitions field. Expiring patents open markets up to generic drug makers, which can offer a similar product at a much cheaper price.
Patent expiration and margin pressure have kept the pharmaceutical grapevine as active as a high school rumor mill before a big dance.
Pfizer Inc., Merck, and Bayer have been mentioned as potential counterbidders for Wellcome. Hoechst AG has been named as a potential suitor as well, although it has reportedly stepped up its efforts to acquire Kansas City-based Marion Merrell Dow.
Market sources think Glaxo's fairly high offer price and its endorsement from the Wellcome Trust, which owns 39.5% of Wellcome's outstanding shares, should keep other suitors at bay.
The Wellcome Trust signed an agreement commiting their shares to Glaxo providing there are no higher bids within 21 days of Glaxo's final offer, expected early next week.