The global capital market has been having a hard time in recent weeks. The share indices are very volatile, with steep falls, and investment portfolios have lost billions of dollars throughout the world. There is no doubt that the current state of the markets is materially different from what prevailed in late July, when Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) announced the largest deal in its history (and the history of the Israeli economy): the acquisition of Allergan's generic division in a $40.5 billion deal.
How, if at all, is the new situation in the markets affecting the giant deal, slated for completion in 2016? In response to a question from "Globes," Israel capital market sources said today that there is no real danger that the deal will be called off. At the same time, some believe that the upheaval in the markets will necessarily make financing the acquisition, initiated and led by Teva CEO Erez Vigodman, more expensive.
The structure of the deal with Allergan is such that Teva will pay most of the price - $33.75 billion - in cash. The remaining $6.75 billion will be paid in shares (less than 10% of Teva's share capital), and the company said when the deal was signed that the exact number of shares would be determined by the weighted average price of a Teva share during the 15 days preceding the announcement of the acquisitions and the five days subsequent to it.
Some of the cash in the deal will be a combination of available liquid balances in Teva's cash and an issue of debt, while the share issue is expected to total $6.75 billion. Followign the report of the deal, the Teva share zoomed by over 16% to $72. Since then, however, most of the gain has been reversed, and the Teva share is currently traded at $63. It is clear that the lower the share price, the greater the dilution in the capital raising will be.
At the same time, it should be noted that the Teva share price is still higher than it was before the acquisition was officially reported. It is believed that Teva is planning to raise capital in two months, which raises the question of whether the state of the markets will allow an offering on such a large scale, and on what terms.
In any case, several days after the acquisition was announced, Teva came to an agreement with a lineup of prominent banks for bridging loan on the scale needed for the deal. The banks undertook to supply the company with $27 billion as a bridging loan for a bond issue, and up to $6.75 billion as a bridging loan for a share issue. The bridging loan provides Teva with an interval, during which it can wait to raise capital, perhaps for a more opportune time in the markets. At this stage, it appears that the company expects no changes in the interest rates, or in market liquidity and demand.
Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2015
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