LONDON The prospects of Swiss drugmaker Roche ROG.VX raising a $45 billion (29.3 billion pound) syndicated loan to finance the buyout of the rest of U.S. biotech group Genentech DNA.N are becoming increasingly remote.
The sheer size of the jumbo deal would eclipse today's shrinking loan market -- a fact which senior banking sources say is putting pressure on Roche to consider alternative funding options. These could be a combination of loans, bonds, equity and cash.
"The question is about size. In light of the current climate, a $45 billion loan looks large. It would have to be a combination of everything -- Roche would have to print bonds to get the deal done," a senior banker close to the deal said.
Roche reiterated on November 25 that it remained committed to its $43.7 billion bid to acquire the 44 percent of Genentech it doesn't already own.
The company has been talking to banks about a jumbo loan since July and has repeatedly said that it is confident of getting the financing in place to back the purchase, despite deteriorating market conditions.
The exact size of the loan that Roche has been seeking was never finalised, but senior bankers said that the company was discussing a $45 billion figure.
Banks, however, are not underwriting any new loans before the end of the year and the drive to deleverage their balance sheets is expected to continue well into 2009, which means that the days of mega-loans are over.
"$45 billion was always right out there, it was the top of the market even in the good old days and I just don't see that number being attainable any time soon," one head of loan syndications said.
BHP LOAN CANCELLED
Speculation that the cancellation of BHP Billiton's (BHP.AX) $55 billion loan last week -- after it dropped plans to take over Rio Tinto (RIO.AX) -- might aid Roche's chances of securing a huge loan was dismissed by bankers.
"The release of BHP's capital doesn't make Roche more viable. You would be replacing one problem with another -- a big funded asset that you can't sell. It's not a credit issue; it's a bank balance sheet issue," the syndicate head said.
Roche has significant capital resources with more than 10 billion Swiss francs of net cash on its own balance sheet at June 30. This, along with cash on Genentech's balance sheet and Roche's own cashflow could further reduce the amount of debt to raise, bankers said.
However, the amount of debt that could be refinanced in the corporate bond market would be the key to any possible deal, they added.
The corporate bond market has recently re-opened but issuance remains patchy and expensive going into the end of the year, which is leaving bankers to speculate that any deal could be some way off.
"For the moment, there are no real developments -- it's in abeyance -- but this is a very good and highly rated company in a good industry with a strong bank group," the senior banker close to the deal said.
Roche argues that bringing Genentech into the corporate fold will give it a stronger and more effective market presence, and generate annual pretax cost synergy benefits of about $750-$850 million.
It would gain control of all revenues for big-selling Genentech cancer drugs Avastin and Herceptin, as well as absorbing an attractive portfolio of new medicines.
Initially, investors viewed the acquisition as done deal and many bet Roche would increase its $89 a share offer to win over the Genentech board.
But since the worsening the credit crisis entered a new phase in September doubts have grown about the acquisition and Genentech shares have fallen a premium to a discount to the Roche offer.
"It doesn't feel right in this environment," said one senior industry consultant.
(Additional reporting by Ben Hirschler; Editing by Richard Hubbard)