Takeda Downgrade Looms After Shareholders Approve Shire Deal

(Bloomberg) -- Takeda Pharmaceutical Co. shareholders’ approval of the $62 billion acquisition of Shire Plc is good news for its bosses’ ambitions to build a global drug giant -- but bad news for its credit ratings.

The backing of what will be the largest-ever overseas purchase by a Japanese company paves the way for possible downgrades to the lowest tiers before junk ratings at both S&P Global Ratings and Moody’s Investors Service. The changes could come within about a month.

What happens after that depends on how quickly Takeda can reduce its debt burden, including progress in potential non-core asset sales worth up to $10 billion, analysts at the ratings companies say. Takeda pulled off a mammoth dollar- and euro-note bond sale last month, and NLI Research Institute said investors are interested in how much the acquisition ultimately benefits the Japanese drug maker.

“If they can harness synergies to boost profit, then in the medium term they should be able to improve their credit rating again,” said Katsuyuki Tokushima, the chief investment analyst at NLI Research Institute in Tokyo. “Otherwise they wouldn’t have undertaken this acquisition in the first place.”

Takeda Downgrade Looms After Shareholders Approve Shire Deal

S&P is expected to reduce Takeda’s credit rating to BBB+ from A minus when the deal is completed. Moody’s has a higher grade now at A2, but has said it could cut that by as many as three steps. A spokeswoman for Takeda declined to comment on the company’s debt.

“The asset sales are quite important to limit the downgrade to one notch,” said Makiko Yoshimura, S&P’s Tokyo-based director of corporate ratings.

The jumbo fundraising effort will swell Takeda’s leverage to about five times earnings. The company wants to get net debt down to twice earnings before interest, taxes, depreciation and amortization or less within three to five years, and has committed to holding off on further acquisitions until then.

Potential Disposals

It proposed ways of doing that with or without up to $10 billion in asset sales, according to a presentation in October. Its European over-the-counter business and a Shire eye disease treatment may be on the auction block, Bloomberg has reported.

“We will focus on whether the company’s elevated leverage can be restored in a relatively short timeframe,” Moody’s analyst Yukiko Asanuma said by email. “Management’s strong commitment to prioritizing debt reduction over further acquisitions and shareholder returns is most important.”

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