Vodafone Finances the Acquisition of AirTouch In April 1999, Vodafone Group Plc reached an agreement

Vodafone Finances the Acquisition of AirTouch

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 In April 1999, Vodafone Group Plc reached an agreement with
11 banks to underwrite and arrange the “facility” or line of credit for
financing the merger with AirTouch Communications, Inc. Under the terms of the
transaction, AirTouch common shareholders would receive five Vodafone AirTouch
ADSs (equivalent to five Vodafone AirTouch ordinary shares) plus $9 in cash.
The transaction closed in July 1999 and was valued at $55 billion. The banking
syndicate consisted of Bank of America, Barclay’s, Banque Nationale de Paris,
Citibank, Deutsche Bank, Goldman Sachs, HSBC, ING Barings, National Australia
Bank, NatWest, and WestLB. The total facility, or amount that could be borrowed,
was set at between $10 and $13 billion. The actual amount required could not be
determined until the closing, when a more precise estimate of cash requirements
could be determined. The term of the major part of the facility was for 364
days, with the remaining balance multiyear. The initial borrowing rate was to
be 60 basis points (six-tenths of 1%) above the London Interbank Overnight
Rate. The actual spread would vary with the tranche (term) selected,
utilization level (amount borrowed), and guarantee structure (the
creditworthiness of those banks issuing letters of credit). Following
completion of the merger, a substantial part of the facility was to be
refinanced in the bond and commercial paper markets through the banks, which
had arranged the facility.

Case Study Discussion Questions

1. Why is short-term bank financing often used to finance an
acquisition?

2. Why did Vodafone seek to convert the short-term bank
financing to longer-term debt?

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