Marketplace Scratch Pad

Let’s make a deal

Scott Jagow Aug 25, 2009

Despite what you may have heard, banks are willing to lend money. Consider this big pharma deal we reported yesterday — drug maker Warner Chilcott buying Procter & Gamble’s prescription drug biz for $3 billion. Did you notice that the deal is completely leveraged?

Not only that, but the banks are giving Warner Chilcott an extra billion to refinance existing debt. Yes, I know interest rates are low, but on the heels of the borrowing clusterbomb that went off on Wall Street not too long ago, is this a good idea?

Here’s what the Wall Street Journal says:

None of the banks wanted to underwrite this deal alone, but “no bank wanted to miss out,” said one person familiar with the matter.

In our story, reporter Jeff Tyler talked to Ken MacFadyen, editor of the Mergers & Acquisitions Journal:

TYLER: …MacFadyen sees the deal as a heartening harbinger for the banking industry.

MACFAYDEN: That’s a good sign to see that the lenders are active again…

And to Vipal Monga from The Deal mag:

MONGA: The fact that the banks are willing to do this suggests that their risk appetite is returning.

TYLER: But that appetite for risk is still a fairly restricted diet. Monga says banks have viewed drug companies as almost recession-proof cash machines, funding several massive pharmaceutical mergers last spring.

MONGA: The banks were willing to put out the money because of the amount of cash-flow that Warner Chilcott generates. And the fact that it was a health-care deal. I don’t think they would have been putting out $4 billion for a transportation deal, for example.

So, maybe this is a one-off and not the beginning of a wave. But it does tickle the stomach a bit, and not in a good way. Reuters blogger Felix Salmon gave his take on the comments in our story:

Me, I’m not so heartened. I’d much rather see the banks’ money going into the real economy, where it can do some good, rather than being used to further lever up a company which was invented by private equity types and domiciled in the tax haven of Ireland.

The leads on this deal are JP Morgan Chase, Bank of America, Credit Suisse, Citigroup, Barclays, and Morgan Stanley. Remember those names, especially if and when any of them starts complaining about how little money they have to lend. Evidently they have no shortage of money if the borrower is one of their old friends in private equity.

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