Bear Market and Credit Risks For Genentech & Roche Merger?
The new bear market and lack of credit and capital globally may have yet a new victim: Genentech (NYSE: DNA). Even if the $89.00 per shares cash deal from Roche is not at risk, you would never know it by the reaction we have seen in Genentech’s stock. Shares are down 5% at $75.00 in early morning trading.
Genetech’s stock was trading at $80.00 just on Wednesday, and shares were north of $90.00 at the end of September. Here is why you have to wonder about the risks to the buyout above and beyond the recent trading action in the stock: This deal to acquire the minority stake at $89.00 per share in cash is a $43.7 billion sum of cash.
Roche shares also look like they are trading at fresh year lows in Switzerland. At the half-year report for June-2008, Roche listed its net cash at 10.115 billion Swiss Francs and its equity was listed as 49.176 billion Swiss Francs. 1 US Dollar today buys right at 1.12 Swiss Francs. The dollar has strengthened, so this merger is going to cost Roche more on a Swiss Franc currency conversion. Earlier this month, Citigroup’s analyst covering this sector said that the deal was now 8% more expensive due to the rise in the Dollar. While that means Roche would make more as Genentech’s revenues are in US Dollars, it still requires coughing up more cash upfront.
If you have been watching this global credit crisis unfold, you already know that banks do not want to lend to each other. They sure as hell don’t want to lend funds for mergers right now. IBM (NYSE: IBM) just paid 8% for a 30-year bond issuance (was a 3-part maturity totaling $4 billion). Recently General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS) just had to pay rates which you could argue were running at 10% for financing from Warren Buffett.
To make matters worse, Genentech wants more money. Roche doesn’t want to pay more money. Shareholders want more money. And now there is a small issue that there just might not be enough money to go around to allow this to close.
Roche already holds the majority stake in Genentech. This global financial crisis might be creating a scenario where holding the majority stake will just have to be good enough.
Jon Ogg
October 10, 2008