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Market receives smoke signals for BAT jumbo bond
July 7, 2017 / 1:19 PM / 4 months ago

Market receives smoke signals for BAT jumbo bond

* BAT expected with European jumbo by month-end

* Europe becomes hotbed for M&A financing

By Laura Benitez

LONDON, July 7 (IFR) - British American Tobacco is expected to hit the market in the coming weeks to help fund the US$49bn acquisition of Reynolds in what could be one of the biggest-ever corporate deals in Europe.

One of the most highly anticipated M&A deals of the year, BAT is potentially eyeing a jumbo multi-currency offering for launch at the end of July, according to a banker familiar with the matter.

“BAT is readying docs. It has shareholder meetings and earnings at the end of July and then it has a window, and they are keen,” the banker said.

The shareholder meeting is due to take place on July 19 and the Reynolds acquisition should close on or around July 25, the company said on its website.

“It could be the biggest bond deal for the European market of all time. And even though they will issue a lot in US dollars, they won’t be leaving euro and sterling investors disappointed,” the banker said.

AB InBev holds the record for the largest corporate deal in Europe, having sold a €13.25bn six-tranche transaction in March 2016.

European bonds have become a hotbed for M&A financing over the last year with a host of US blue-chip companies raising debt in jumbo multi-tranche format.

Deals for AT&T, Allergan and Verizon have demonstrated Europe’s ability to compete with the US dollar market thanks to the attractive coupons they can attain.

Investors have long speculated over the skew between the US dollar, sterling and euro portions of the BAT deal. The company announced earlier this year it will refinance US$20bn across two bridge facilities in the three currencies.

BAT will have to weigh up the costs of issuing in euros and sterling versus US dollars, particularly because the acquisition will be paid for in the latter currency.

BAT’s euro and US dollar bonds trade roughly flat to each other after factoring in the basis swap, meaning it has flexibility around its funding strategy, albeit before taking into account the other costs associated with a swap.

BAT’s €650m 2.75% March 2025 notes are bid around 70bp over euro swaps, equivalent to US$ Libor plus 120bp, which is where its US$1.5bn 3.95% June 2025 bonds are trading.

The company will also be keeping a close eye on the rates market, where both Bunds and Treasuries have sold-off sharply.

Ten-year Bund yields have jumped more than 30bp over the past fortnight following hawkish comments from Mario Draghi late last month. Ten-year Treasury yields, meanwhile, have gained over 20bp during the same period.

Both the ECB and FOMC meet later this month and the outcome of those meetings could yet impact the BAT deal.

A spokesperson at BAT declined to comment on the timing and size of the transaction.

BAT has mandated 19 banks for the bridge portion of the financing. (Reporting By Laura Benitez, editing by Sudip Roy and Julian Baker)

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