(Bloomberg) -- Clayton Dubilier & Rice is discussing the possibility of using borrowed money to fund a part of the equity check in its bid for Sanofi’s €15 billion ($16.6 billion) consumer health division, according to people familiar with the matter.
The New York-based buyout firm is talking with banks about obtaining so-called back leverage, said the people, who asked not to be identified because the process is confidential. That’s a type of loan that buyout shops can obtain to finance part of an equity investment in a specific company.
Back leverage is one of a range of options that CD&R is discussing in the structuring of a bid for the Sanofi unit, said the people. Talks are ongoing over what percentage of the equity check would be financed with borrowed money, and it’s possible the firm decides not to use any financing for it, the people said.
A spokesperson for CD&R declined to comment. Sanofi reiterated it’s considering potential separation scenarios for the consumer business, including a sale or a stock market listing, with a decision likely in the next few months.
Borrowed Money
Typically in a leveraged buyout, the bulk of the purchase price is paid with money that’s borrowed, and paid back, by the target company. The private equity buyers put in a relatively small amount of their own cash as equity.
But in a fairly new turn of events, buyout shops now are also turning to borrowed money in order to help fund the equity portion of deals. Such financing makes investments more risky by adding more debt to deals that are already highly levered.
It’s partly a reflection of a challenging climate for asset sales. Private equity firms have been having difficulties in exiting their portfolio companies thanks in part to disagreements over valuations.
Back leverage can give sponsors extra liquidity that allows them to buy large targets. The shares of the private equity-owned company are used as the collateral for the loan, which is subordinated debt and usually sits at the level of the holding company that owns the target.
Back leverage is one of a handful of strategies, along with payment in kind debt and net asset value loans, that private equity firms have been using to deal with the slowdown in dealmaking amid higher interest rates.
The use of back leverage also boosts returns for the private equity fund’s investors, the limited partners. By leveraging its equity investment at the holding company level, the sponsor can raise cheaper financing than a straight equity investment.
The Sanofi unit, which sells non-prescription medicines, could be valued as much as €15 billion in a sale, Bloomberg News has reported, meaning a hefty equity check will be required from the bidders.
Banks are already putting together a €7.5 billion ($8.3 billion) debt package for the buyout, which makes the planned transaction one of the biggest LBO financings in recent years.
CD&R is competing for the Sanofi business with French rival PAI Partners, with bids due this month.
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