Tuesday, December 7, 2010

Merck Has a "Red Herring" Debt Shelf Takedown Offer "On The Street" This Morning

UPDATED -- Still no aggregate size indication, but B of A (using the Merrill Lynch imprint) and J.P. Morgan are leading the underwriting syndicate, as joint book-runners.

Heh! Note: No Goldman, Sachs & Co.; no Morgan Stanley. No shock, that -- after Goldman suggested buying puts on Merck common stock, at a strike price of $35, about two months ago, and that was after downgrading Merck to "neutral", in May of 2010.

Now, the glaring ommission of Morgan Stanley, on the other hand -- is a more complicated story. Morgan Satanley, you see, is overseeing the Merial divestitures, according to published reports. As such, it will make massive fees; so Merck need not spread any more paper to the house, to keep it in "good graces". Yes, gentle readers, this is -- despite the endless stream of "Lady MacBeth-esque" protestations to the contrary from Wall Street -- exactly how these deals work.



With five year Treasuries yielding 1.60 percent and 10 year Treasuries yielding 3.04 percent this morning, Merck could price these at around 75 basis points over that -- or around 2.4 percent on the five year; and 3.8 percent on the ten year Merck paper. Let's see where they actually land, shall we?


Quoted below in blue is a bit of the "Risk Factors" section -- from the just-SEC-filed 424(b) so-called "red herring" shelf takedown debt prospectus. A red herring prospectus is used to solicit interest in the securities, while the underwriters make book, on the interest rate(s) needed to sell the entire offering. It is used as a stalking horse in the bdding process.

This deal may be priced and finalized yet this afternoon, as it has been rated A1, stable by Moody's. If that happens, Merck will have the cash by Friday, under the standard three day settlement rules.

Here is a salient bit from the "red herring" filed this morning:
. . . .The notes are not guaranteed by any of our subsidiaries and therefore the notes will be structurally subordinated to all existing and future secured and unsecured indebtedness and other liabilities of our subsidiaries. The indebtedness of our subsidiaries totaled $8.7 billion as of September 30, 2010. In addition, as of September 30, 2010, certain of our subsidiaries also guaranteed $7.8 billion of our existing indebtedness ($0.7 billion of which matured on October 1, 2010). Our obligations under the notes will be structurally subordinated to guarantees by our subsidiaries of our indebtedness. We also guarantee indebtedness of our subsidiary Merck Sharp & Dohme Corp. (“Old Merck”), including $8.5 billion aggregate principal amount of its outstanding debt securities. Therefore the notes will be structurally subordinated to Old Merck’s obligations with respect to those debt securities, and our guarantee of those debt securities will rank pari passu with the notes. The terms of the notes and the indenture do not preclude our subsidiaries from incurring debt or other liabilities or providing guarantees that will be structurally senior to the notes. . . .

We'll let you know when it is priced. The interest rate(s) paid by Merck are likely to be very low -- based on the historic lows in comparable Treasuries, plus a spread to reflect Merck's slightly worse credit rating than the US government. BofA and J.P. Morgan reciprocal back-scratching, courtesy of Whitehouse Station, is now in full-effect.


Anonymous said...

I think it's interesting that this sentence was added to the 'offering' ...

"Efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales."

Curious to get your take on why this particular sentence was put into the offering. With all the controversy about Gardasil (and perhaps some of their other drugs), one could read into this that they were never "scientifically justified." Certainly Merck has seen declining sales of some of their products that they anticipated being blockbusters.

Is Merck anticipating other drug withdrawals or the withdrawal of Gardasil due to the overwhelming number of AE reports?

Seems to me they are covering all bases with respect to liability.

condor said...

Actually, the same risk factor is in the 2009 year end SEC filed Form 10-K, near the top of page 31 (filed with the SEC on the morning of March 1, 2010):

Pharmaceutical products can develop unexpected safety or efficacy concerns.

Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, consumer fraud and/or other claims. . . .

Even though it is not new, I think you are right that Merck is looking to cover all bases.

Thanks for the cogent comment!


condor said...

And -- to be clear -- I think Merck means to say that it is not clear that "the safety or efficacy concerns" are "scientifically justified" -- though the sentence is poorly constructed and is capable of being read the way you've read it.