Bristol-Myers Squibb’s (BMY, Financial) move to raise close to $20 billion in debt to acquire Celgene (CELG, Financial) looks dangerous, but years from now it may be considered a savvy move.
True, the huge aggregate number of $58 billion in combined debt between the two companies certainly doesn’t look all that flattering, especially in the context of threats by all three credit rating agencies – Moody’s, Fitch and S&P Global Ratings – to downgrade the company’s credit rating. The ratings agencies correctly cite total debt at 4x earnings, and that makes the corporate bond markets justifiably jittery.
Yet, look closer into the structure of the total combined debt load between both companies and its overall repayment schedule, and it really isn’t that bad. Now may be the best time for Bristol to seal the deal and lock in extraordinarily low interest rates while they last.
What the headlines aren’t being explicit about is that the vast majority of Bristol’s bond issuance is completely fixed rate, along with all of its own and Celgene’s existing debt burdens. The highest rate it will pay will be 4.25% for $3.75 billion due in 2049. In the context of today’s extraordinarily low interest rates, 4.25% seems high, but it’s only 78 basis points higher than what the federal government itself was paying on bonds of the same maturity only seven months ago in November 2018. Plus, until November 2008, the 30-year Treasury rate has always, without exception, been above 4.25%.
This is all merely an exercise in economic history, but the practicalities are also quite strong. Only $1.25 billion of Bristol’s total debt issuance will be floating rate, and on top of that, there is no other floating rate debt at all between Bristol and Celgene, period. In Bristol’s latest 10-K, it reported straight out that even a 100-basis-point increase in short-term or long-term interest rates would be immaterial to its earnings (page 54).
There are a few key years of significant repayments that the combined company will have to get through, but they're not that gargantuan. (For the full debt repayment timeline, see page 85 of Bristol's previous 10-K linked above, and page 59 of Celgene's.) Parsing its entire combined debt repayment schedule out to 2097 (no, that is not a typo), we have the following. This year, 2019, $1.25 billion comes due. By 2020, another $2.75 billion. Another $2 billion is due 2021, and $4 billion in principle by 2022. That’s a combined $10 billion in roughly three and a half years.
Is that doable? Well, in 2018 the two companies had combined Ebitda of nearly $12 billion, and combined earnings of nearly $9 billion. Pooling all cash and short-term investments on both companies’ balance sheets right now yields $16.5 billion. So can a combined Bristol-Myers Sqibb-Celgene pay back $10 billion in three and a half years? It certainly seems likely. Afer that, the debt burden drops off somewhat while all floating rate debt will be paid off. In the three years following from 2023 to 2025 inclusive, $9.2 billion in principle comes due, and then nearly $10 billion again over the next four years through 2029.
So yes, up through 2022, full repayment could be mildly challenging, but nothing that can’t be handled. Over the next 10 years a combined Bristol-Celgene giant will have close to $30 billion in principle to pay off. This is all well within its reach. Plus, if interest rates start to rise significantly even to historically normal levels, the new company will be on easy streak in debt repayments, paying back at a fixed rate in inflated dollars.
Unless there is a big shock to the pharmaceutical industry by 2022, Bristol-Myers and Celgene should be in good shape regardless of what the credit rating agencies say now or how investors perceive these big aggregate debt numbers. It will certainly be in a much better situation than the federal government, that’s for sure.
Disclosure: No positions.
