There is arguably no such thing as an easy cross-border acquisition, but the complexity and the stakes increase when the target is one of the last remaining strategic deals available in a rapidly consolidating sector and the asking price is $13.4 billion.
That was the prospect facing French chemicals giant Air Liquide in mid-2015 as it contemplated a bid for US distributor, Airgas.
In a deal of this size, a raft of banks will inevitably be involved in risk management, financing and advisory roles, but Barclays was present throughout – speaking with Air Liquide at the inception of the deal, acting in multiple financing roles and seeing the deal through to its conclusion via a tense, multi-bank deal-contingent hedge that is believed to be one of the biggest the market has ever seen.
"It has been a hectic year, but we are very pleased with the process and the work done with our core banking group. Barclays' team has been second-to-none from the beginning to the last day of the transaction. It has been challenging but a very good outcome," says Jacques Molgo, group financing and treasury director at Air Liquide, based in Paris.
Conversations with Barclays and BNP Paribas started in the middle of 2015, with the optimal financing structure – and risk management policy – being sketched out in the weeks and months that followed. On November 17, Air Liquide publicly announced the acquisition and executed a $12 billion bridge loan, for which Barclays and BNP Paribas were joint underwriters.
To refinance the loan, Air Liquide issued debt in a mix of currencies, including a total of just over €7 billion. As a result, it was clear early on that a foreign exchange hedge would be needed. And because that hedge was so large, the company was keen to obtain hedge accounting treatment.
A ratcheting structure ensured Air Liquide got a more attractive pricing should the deal close before that date
Milena Dapcevic, Barclays
"Due to the size of the exposure it was more than an inconvenience. We were looking for solutions we could hedge-account, so we structured everything in a manner to avoid profit and loss swings," says Molgo.
The chosen hedge was a series of deal-contingent forwards, enabling Air Liquide to fix an exchange rate in advance for the euro component of its US dollar purchase, with no obligation to transact if the deal falls through.
For the banks, the collapse of a deal can leave them exposed on hedges they execute against the contingent trade. The consolation is often that the period of uncertainty is short – a matter of months. In the case of the Air Liquide transaction, the need to obtain hedge accounting meant the hedge had to run until the last possible moment a deal could be concluded – the longstop date – which was almost a full year after Air Liquide began executing its forwards.
Forwards started to be traded immediately after the deal had been approved by Airgas shareholders on February 23. At that point, the biggest risk to the acquisition was US regulatory approval, and a decision was not expected to drag on – as such, to keep costs down for the corporate, the structure of the forwards included a feature whereby the price would be lower if the deal was closed early. The price of the hedges would increase as time went by for the deal to close.
"We discussed with Air Liquide the most appropriate structure for the deal-contingent. They needed to have a deal-contingent that would match the longstop date. A ratcheting structure ensured they got a more attractive pricing should the deal close before that date," says London-based Milena Dapcevic, head of capital structure and risk advisory for Europe, the Middle East and Africa (Emea) at Barclays.
It was not granted that this could be 100% hedged, but little by little we managed to do it
Jacques Molgo, Air Liquide
Molgo at Air Liquide says: "Basically we didn't want to enter into this transaction before the Airgas AGM had approved the deal. So, in essence, I asked my team to get ready to start dealing on the very next day."
This was a tense period. Air Liquide had begun sounding out its 16 core banks in late 2015, to find a group that would execute the hedge. Some did not have the appetite – relatively few banks have experience in pricing and risk-managing contingent trades – and others were ruled out by the company because their quotes were too high. Molgo and his colleagues at Air Liquide did not know at the start of the hedging process whether they would find enough appetite to complete the hedge.
"It was not granted that this could be 100% hedged, but little by little we managed to do it," says Molgo.
Barclays got the ball rolling, taking the first – and biggest – chunk of the hedge, and later agreeing to increase the size of its exposure to a total of $1.2 billion, the largest of the participating banks.
"As a key financial adviser, the confidence we expressed on the success of the transaction was helpful in providing comfort to the other participating banks, and therefore assisting Air Liquide to get sufficient capacity in the bank group to hedge the risk," says Juan Flames, head of risk solutions for Emea at Barclays, based in London.
By the end of March, the de-risking was complete.
The timing was good for the acquisition and the accompanying hedges – in addition to the jumbo forex hedge, the company also executed $3.25 billion of vanilla interest rate hedges, with Barclays again contributing the largest share.
"In 2016, markets saw a lot of turbulence, but Air Liquide and its banks managed to seize the most opportune windows for the company's large capital markets refinancing, pre-empting Brexit and US elections, and navigating central bank decisions among others. It was a great achievement," says Paris-based Florian Martin, a director in the Emea investment banking team at Barclays.