Shares of Elanco Animal Health tumbled as much as 9% on Tuesday morning after the company said it would load up on debt to buy the animal-health unit of German pharmaceutical giant Bayer AG for $7.6 billion.
Elanco is already saddled with about $2.5 billion in long-term debt, which it called “substantial” in its 2018 annual report, and warned at the time it might not be able to generate sufficient cash to pay the debt service.
The Greenfield-based company said Tuesday it plans to take on “significant” additional debt to help pay for the Bayer acquisition, but did not say exactly how much.
Elanco said it will pay for the Bayer deal with 70% cash and 30% Elanco stock valued at $33.60 per share. The cash component will be funded through a combination of debt and equity, the company said.
In a conference call, some analysts pressed for more information about the additional debt.
“What is the magnitude of the total debt raise, please?” asked Navin Jacob of UBS. And a moment later, he asked again: “Can you help us understand what the total debt amount will be?”
Elanco officials did not provide a number.
“That does assume a significant debt raise but also issuing additional equity,” said Todd Young, Elanco’s chief financial officer. “We’ve not defined those exact ratios yet, but it will certainly be a component of the equity in order to not be more levered than what we’ve already stated.”
In a slideshow on its website, Elanco said it expects to have debt that is five times adjusted earnings before interest, taxes, depreciation and amortization. But it said it expects to bring that ratio down to below three times adjusted EBITDA by 2022, based on the “global diversified strength” of the combined companies.
“While we will be increasing our (debt) leverage in the near term, this slide shows how rapidly we expect to bring the leverage down,” Young told analysts.
Fitch Ratings placed Elanco on “rating watch negative” on Tuesday, citing the company’s significant increase
in debt leverage.
Elanco CEO Jeff Simmons said the deal was too good to pass up, and will double Elanco’s portfolio of pet medicines, expand the company’s pipeline and deliver “significant” financial benefits.
“We don’t have the luxury to wait and see,” Simmons said in the conference call. “We don’t need to do a deal like this to achieve the mid-term goals we’ve set out. But we are convinced that this is the right move to position Elanco for the long term.”
Investors, however, appeared to be nervous by the terms of the deal. Shares of Elanco dropped $2.42 in midday trading, down about 8%, to $27.40 each.
The deal, expected to close by mid-2020, would swell Elanco from the world’s fourth-largest animal health player to the second largest, behind only New Jersey-based Zoetis Inc., a former subsidiary of Pfizer.
Elanco was spun off from Indianapolis-based Eli Lilly and Co. last fall, a move intended to unlock more value for both companies.
Bayer has been under pressure to divest assets and raise cash to lower debt after buying St. Louis-based Monsanto Co. for $63 billion last year. In November, Bayer CEO Werner Baumann said the company would seek to sell its animal-health division, which has a diverse product line, including its best-selling Advantage flea, tick and worm treatment for small animals.
The deal further diversifies Elanco’s product line, which includes Interceptor Plus, a heartworm prevention for dogs, and Posilac, a hormone for dairy cows.
Elanco has grown rapidly through at least 10 acquisitions since 2007, including the $5.4 billion takeover of Novartis AG’s animal-health unit in 2014.
Earlier this year, Elanco paid $234 million to acquire Aratana Therapeutics, a Kansas-based startup that is developing medical treatments for dogs and cats.
Elanco, which had 2018 sales of $3.1 billion and has a stock market value of $11.1 billion, has more than 5,000 employees worldwide, including more than 800 in Greenfield.