Monday, June 22, 2009

First Set of Combined Pro-Forma Financials Filed With SEC. . . .

As Merck prepares to issue four separate tranches of merger-related debt securities -- for an indicated $3.5 billion principal amount, in the aggregate -- it has filed an SEC Form 8-K, with some unaudited pro-forma combined financial statements for the two companies -- as though they were already one.

This is significant, because it represents the first public disclosure of the more detailed financial picture Merck expects will emerge, as the two companies are combined. I am still tearing through it -- but this much deserves mention:

. . . .Note 3(r):

Represents the fair value adjustment associated with Merck’s previously held equity interest in the Merck/Schering-Plough cholesterol partnership resulting in a gain, substantially all of which is reflected as a corresponding fair value adjustment to intangible assets and the remainder as an adjustment to inventory. Under FAS 141(R), a business combination in which an acquirer holds a noncontrolling equity investment in the acquiree immediately before obtaining control of that acquiree is referred to as a “step acquisition.” FAS 141(R) requires that the acquirer remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss in earnings. Because this adjustment will not have a continuing impact, it is excluded from the unaudited pro forma condensed combined statement of income. . . .

That is from Footnote 3(r) to the pro-formas. It would seem that Merck will book a one-time, non-operating gain, as it consolidates the Cholesterol J/V -- and will use that to offest a write-down in the Vyotrin and Zetia inventory the J/V now holds -- as selling-prices, and thus carrying values, for those two drugs have eroded substantially in the last twelve months.

Much more as I sort through it all. Additional graphics coming, on the $3.5 billion in total tranches of proposed debt offerings, as well. Here is what is known on these coming debt offerings -- per Reuters:
. . . .The offering includes a two-year note tranche expected to yield about 87.5 basis points over comparable U.S. Treasuries.

It also includes a six-and 10-year note tranche both expected to yield about 150 basis points over U.S. Treasuries and a 30-year bond tranche expected to yield between 155 and 160 basis points over Treasuries.

Proceeds from the offering will be used to help finance its $41.1 billion acquisition of Shering Plough, according to IFR.

Banc of America Securities, Citigroup Global Markets, JP Morgan and RBSGC are the joint lead managers on the sale. . . .

As one potentially helpful comparison point, for these spreads -- I'll note that Pfizer's three year debt (Pfizer is -- of course -- also involved in a pharma mega-merger) was recently trading at 125 bips over the relevant U.S. Treasury instrument. That is about dead in the middle of the two year, and six year, spreads quoted above for Merck's offering. Seems in line, and well in the middle of this market (these spreads are plainly much wider, than they would have been, pre-market meltdown of last fall). More soon.

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