LONDON, May 16 (LPC) - Banks are lining up a jumbo leveraged loan financing of around SFr5bn-equivalent (US$4.955bn) to back a SFr10.2bn sale of Nestle’s Skin Health business to a consortium led by EQT Partners and Abu Dhabi's ADIA, banking sources said on Thursday.
Nestle entered exclusive negotiations with EQT, a unit of the Abu Dhabi Investment Authority, PSP Investments and other institutional investors, it was announced on Wednesday.
Credit Suisse, Deutsche Bank and Goldman Sachs are expected to lead the financing alongside a number of other banks including Bank of America Merrill Lynch, Barclays, Mizuho and RBC, the sources said.
The financing is set to include around SFr3.5bn of senior leveraged loans, SFr1.3bn of preplaced second-lien loans and a SFr500m revolving credit facility.
Between 60%-80% of the financing will be denominated in dollars with the rest denominated in euros, the sources said.
EQT declined to comment.
At SFr1.3bn, it will be the largest second-lien loan since the financial crisis, several sources said.
“High-yield bonds had been considered but there is huge demand for second-lien so this will be the largest since the financial crisis, arguably if not ever,” a senior banker said.
Second-lien loans will offer EQT more flexibility than high- yield bonds as second-lien paper doesn’t come with non-call periods making it far easier to repay the debt.
That could be helpful if EQT decides to pursue a divestment strategy on the Skin Health unit, which has two main businesses -- medical and consumer.
While the medical business, which includes prescriptions and aesthetics under the Galderma brand, are seen as a good fit for private equity, the consumer business that includes the Cetaphil and Proactiv brands has been seen as better suited to rival industry players and could therefore be sold off.
The jumbo loan financing has been much anticipated by cash-rich investors desperate to put money to work and is set to be popular, despite being highly leveraged.
Leveraged loan volume has been disappointing for both banks and investors having reached its lowest levels in ten years during the first quarter of 2019, according to LPC data.
Just this week, banks dropped a €2.72bn leveraged loan financing for German online classifieds group Scout24 following a failed takeover bid, missing out on an approximate €28m fee that will further impact a depleted 2019 budget.
As a result of low deal volume, banks have become ultra aggressive in a bid to win financings, confident they can sell highly leveraged, aggressively structured loans to investors in strong, well-liked assets.
“It will be an aggressive financing but it will be well received. It is a great story and there is a big equity cheque coming in,” a second senior banker said.
AT US$10.1bn, it is the second largest private equity-backed M&A deal in Europe since the financial crisis, after the €10.1bn buyout of Akzo Nobel’s chemicals business by Carlyle and Singaporean wealth fund GIC, according to Refinitiv data.
EQT and ADIA beat off stiff competition from rival buyout funds and some industry players including a consortium of Advent and Cinven, as well as US private equity firm KKR & Co Inc and European fund PAI Partners. Carlyle had also been looking at the medical business.
Some of those that missed out are suffering unusually high losses of around US$10m-$20m, having spent a lot in due diligence, advisory and legal fees due to the complexity of the transaction and the fact that they were in the race up until the last moment with committed financing in place, sources said.
Typically sponsors will spend around US$2m-$5m when considering a buyout, the sources said.
“It is a very high profile business with big equity cheques going in so it is at the very upper end of what a sponsor would spend. It was extremely competitive up until the last minute and there were five to six fully financed bids. Usually firms drop away earlier. They will have to swallow it up, there is nothing they can do,” the second senior banker said.
A third senior banker added: “Sponsors would have spent a fortune given the asset is so big and there was a lot of work involved. They would have had to commit a lot of resources to do this properly. Costs are a risk in any auction, but they were magnified in this instance given the size and complexity.”
The proposed transaction with private equity firm EQT and ADIA is expected to close in the second half of 2019, pending regulatory approval. (Editing by Christopher Mangham)