AstraZeneca was the well-deserved winner in this year’s Corporate Finance category, with an unusual $3.5bn equity issue that was made all the more challenging by volatility arising from Brexit.
The equity issue in March 2019 was to fund a 50-50 joint venture with Japanese firm Daiichi Sankyo. The goal of the joint venture was to commercialise a potentially transformative medicine for the treatment of breast (and other) cancer. The joint venture agreement included a non-contingent initial payment of $1.35bn, split across 2019 and 2020, as well as further contingent payments of up to $5.55bn, with around $1bn of these expected in the first three years.
At the time, AstraZeneca’s financial credit metrics were already outside the rating agencies’ target parameters for their A3/BBB+ ratings, meaning it was not possible to fund the collaboration with debt without a rating downgrade, which would have taken the group outside of its rating target. Other options, including equity credit instruments such as hybrids, were not viable due to the timescales involved.
Instead, the treasurer’s recommendation to the CFO was to carry out an equity issue via an accelerated book build – an uncommon funding route for large investment-grade corporates. Consequently, the treasury team had to evaluate the implications of this strategy and communicate these to the CFO and board before getting the go-ahead.
The deal included many standout features. For one thing, the timeline was very short – not least because the issue needed to be completed before Daiichi Sankyo’s year end on 31 March. In the event, less than two months elapsed between the possible collaboration gaining some real traction and the completion of the equity placement, with most of the issuance activity taking place in the last two weeks of that period.
Adding to the challenge, the deal took place against the volatile backdrop of the UK government’s third meaningful vote on Brexit, which was held on the day of pricing (29 March 2019).
Despite these hurdles, the deal was the largest accelerated equity book build in the UK for 18 years, as well as the largest ever in the global healthcare sector and the first time in AstraZeneca’s history that the company had issued equity for such a purpose. AstraZeneca negotiated fees down significantly from what might usually be expected for such a transaction.
The issue also included an FX component: while the equity placement proceeds were largely in GBP (only 5% of shareholders took up the option of settling in USD rather than GBP), the consideration payable to Daiichi Sankyo was in USD. Consequently, AstraZeneca’s treasury had to sell £2.5bn of the GBP proceeds for USD during the day of pricing as the book built.
Despite these challenges, the equity raise was around two times oversubscribed, was priced with only a 1.5% discount to the day’s midpoint and was within 7% of the company’s then all-time-high share price. The company used $1bn of the proceeds to strengthen the balance sheet, prompting Moody’s to change the outlook on AstraZeneca’s A3 rating to stable from negative.
“We don’t see many situations like this, so AstraZeneca’s deal really stood out – not least because the equity side is not always driven by treasury. Added to that, the Brexit vote made this a particularly challenging time for the launch.”
Providers: Goldman Sachs, Morgan Stanley
Structure: $3.5bn equity issue via an accelerated book build
This article was taken from the October/November 2020 issue of The Treasurer magazine.