VWR seen unlikely to contribute much to financing acquisition by Avantor Performance Materials

By Paul Deckelman

New York, May 5 – The news that Avantor Performance Materials, Inc. plans to acquire VWR International LLC in a transaction valued at some $6.4 billion sets up the likelihood of a new bond deal sometime in the coming weeks as part of the overall financing for the transaction, although its size and likely structure are for now up in the air.

However, VWR is not expected to be able to contribute very much to the financing of the acquisition, according to Covenant Review, a New York-based independent credit research firm that specializes in the in-depth analysis of bond indenture covenants.

In a research note released on Friday, Covenant Review pointed out that if Avantor, or its corporate parent New Mountain Capital, wants to use VWR’s cash on hand, or that of its restricted subsidiaries, or have VWR or its units incur or guarantee debt to fund payments to its equity holders in connection with the acquisition, “generally there would need to be sufficient restricted payments capacity” available for such an expenditure or debt incurrence according to the terms of the indenture governing VWR’s €503.8 million of outstanding 4 5/8% senior notes due 2022, which the company issued in March of 2015.

Covenant Review noted that VWR’s capacity to make such restricted payments “is limited relative to the company’s equity value, and generally would prevent [VWR and its restricted subsidiaries] from incurring or guaranteeing a meaningful amount of acquisition financing that would be used to fund payments to the company’s equity holders in a leveraged acquisition,” unless the bonds are taken out or consent is given by the bondholders.

Covenant Review allowed that while estimating restricted payments capacity “is always tricky because only the company would have all the information required to calculate the various contractual addbacks to the definition of “consolidated net income” [used to figure out such capacity], we roughly estimate that, due largely to there being only two years for basket build-up capacity to accumulate, the issuer [i.e., VWR] would not have a meaningful amount of restricted payments capacity at December 31, 2016 compared to the company’s equity value” – thus limiting the amount of VWR’s cash on hand that could be used for the financing or precluding “putting a significant amount of debt” on VWR or its restricted subsidiaries or having them guarantee a significant amount of debt of the new parent company that would be created by the acquisition.

Its analysis further said that holders of the VWR notes have the right to put them back to the company at 101% in the event of a change of control, so that should New Mountain, as expected, acquire all or a controlling stake in VWR’s equity, the notes “will have good downside protection if the acquisition closes.”

Avantor, a Center Valley, Pa.-based supplier of ultra-high-purity materials for the life sciences and advanced technology industries, formed in August 2010 when New Mountain Capital purchased the business from Covidien Inc.

Avantor was heard by syndicate sources to be arranging bank debt and bond financing for the VWR acquisition via Goldman Sachs Bank USA, Barclays and Jefferies LLC.

It intends to get up to $5.5 billion in senior secured credit facilities and has received a commitment for $2.25 billion in senior unsecured bridge facilities in U.S. dollars and possibly euros to help fund the deal, according to an 8-K filed with the Securities and Exchange Commission on Friday.

A market source said that bonds would be part of the final capital structure.

The credit facilities include $5 billion in U.S. and euro first-lien term loans and a $500 million revolver, which may be reduced by the amount of commitments under the company’s receivables securitization facility.

Radnor, Pa.-based VWR, which was bought by Madison Capital Partners in 2007 and then went public in October 2014, is a provider of product, supply chain, and service solutions to laboratory and production customers.

Under the agreement, VWR is being bought for $33.25 in cash per share, reflecting an enterprise value, including assumed debt, of about $6.4 billion.

Closing is expected in the third quarter, subject to the expiration of a “go-shop” period, the expiration or termination of the applicable waiting period under Hart-Scott-Rodino Antitrust Improvements Act and European Commission approval, obtaining any required clearance, consent or approval under applicable foreign antitrust laws, VWR shareholder approval, and other customary conditions.

Following the closing, New Mountain Capital will be the lead shareholder of the combined company.

Sara Rosenberg contributed to this story

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