Broadcom is using a tactic popularized by corporate raiders in the 1980s to convince Qualcomm and its shareholders that it has the means to complete the biggest tech deal ever.
A group of the world’s biggest banks have told Broadcom they are “highly confident” that they’d be able to arrange financing for the $105 billion offer in debt markets. So-called highly confident letters hark back to the days of junk-bond king Michael Milken’s Drexel Burnham Lambert before it collapsed, and are often used in hostile takeovers that require large sums of debt. Carl Icahn used such a letter in his pursuit of petroleum company Phillips 66 in 1985. More recently, Bayer used one in its $66 billion bid for Monsanto Co.
“I remember when we did it, and I guess I should have copyrighted it,” Icahn joked Monday when asked about his use of the letters. A representative for Broadcom declined to comment.
For acquirers, it allows them to line up Wall Street banks without having to shell out costly commitment fees. And for the underwriters, it keeps them from having to put their balance sheets at risk should markets seize up and the bankers fail to come up with the funds.
It can also bring risks for the shareholders considering the offer. Back in 1989, banks offered a highly confident letter to endorse billionaire investor Marvin Davis’ proposed $6.75 billion buyout of United Airlines parent UAL Corp. before the deal collapsed and sent both UAL shares and the S&P 500 plunging.
“It was made up to provide the market comfort, especially in hostile situations, that financing shouldn’t be an issue,” said Ava Yaskiel, global head of the corporate, M&A and securities practice at law firm Norton Rose Fulbright. “A bank would be leery of giving the highly confident stamp if they didn’t believe in it. And with such a huge amount of money involved, getting this sort of letter sends a positive signal to the target shareholders and the market generally.”
While Broadcom hasn’t said exactly how much it would need to raise from debt markets, it would take about $88 billion to meet the cash portion of the $70 a share offer. Silver Lake Partners has provided a commitment letter for a $5 billion convertible debt financing for the deal.
That could mean a Broadcom debt deal would potentially rival the $75 billion in loans that Anheuser-Busch InBev NV got in late 2015 to fund its takeover of SABMiller. The world’s biggest brewer later sold a record $63 billion of bonds globally to take out the loan.
Broadcom’s “highly confident” letter comes from Bank of America Merrill Lynch, Citigroup, Deutsche Bank, JPMorgan Chase and Morgan Stanley, which make up five of the top eight underwriters in the U.S. corporate bond market this year. The banks have helped companies sell $1.3 trillion of bonds this year, which is putting 2017 on pace for a record. It’s the sixth straight year that companies have raised at least $1 trillion from debt markets as investors globally seek alternatives to almost $9 trillion of negative-yielding debt.
Wall Street bankers are anticipating that debt investors would jump at the chance to buy bonds of the chip-making powerhouse that would result from a Broadcom-Qualcomm tieup -- even as the total price tag climbs to $130 billion when debt’s included.
While Broadcom is rated in the lowest tier of investment-grade, it has almost $5 billion of free cash flow the past 12 months, and its earnings before interest, taxes, depreciation and amortization -- the debt market’s favored measure of earnings -- has climbed for four straight years. Qualcomm, meanwhile, has generated between $4 billion and $7.7 billion of cash in each of the past five years and was sitting on a $35 billion cash pile at the end of September.
Broadcom’s bankers are estimating there could be appetite from debt investors for as much as $100 billion for such a deal, according to a person with knowledge of the discussions.
“It’s going to be a major market leader in chips and even though the leverage is relatively high, they would be committed to deleveraging and would have free cash flow to get back to a lower leverage target,” said Jason Shoup, a money manager at Legal & General Investment Management America, which oversees more than $150 billion.
Qualcomm shares have jumped 14 percent since Nov. 2, the day before the deal talks were first reported. Meanwhile, Broadcom has gained 7 percent.
That said, investors will have their limits, Shoup said. “There are plenty of examples where leverage on tech companies has been a bad recipe and a recipe for downgrades,” he said.
Things could get more complicated, however, if Qualcomm were to complete its proposed $47 billion purchase of NXP Semiconductors. Broadcom says its offer stands whether that deal happens or not.
“If you get NXP involved as well, you’re going to end up with a pretty heavily levered enterprise,” said Noel Hebert, an analyst at Bloomberg Intelligence. “I think they can do it and retain the investment grade, but it would be super-aggressive, and I’m not sure how much latitude the ratings agencies will give them,” he said.
First Published: November 8, 2017, 9:45 a.m.
