The mind boggles at the news that banks are financing Warner Chilcott’s acquisition of Procter & Gamble’s drug business with more capital than the acquisition price.
Warner Chilcott, a private equity owned drug company based in Ireland, is paying $3.1 billion to buy the drugs business of Procter & Gamble. But banks are providing $4 billion in financing for the deal, giving Waner Chilcott an extra $900 million to refinance existing debt. As Felix Salmon points out, that means that the financing for the deal total 129% of the acquisition price.
Why would they do that? Shouldn’t Bain Capital and Thomas H Lee Partners, the private equity names behind Warner Chilcott, be expected to pony up some of their own capital?
The leads on this deal are a who’s who of megabanks: JP Morgan Chase, Bank of America, Credit Suisse, Citigroup, Barclays, and Morgan Stanley. What’s in it for them is the promise of future business with the private equity companies behind Warner Chilcott.
It’s really the same logic that was behind JP Morgan lending billions to California and announcing that they didn’t really care about the yield. It was a loss leader, a deal undertaken in the hopes of winning future business. Particularly in times when leveraged finance deals are few and far between, banks have to be willing to take on ridiculous private equity deals like this if they want to be at the table on subsequent deals.
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