ROCHE HOLDING AG: FUNDING THE GENENTECH ACQUISITION Harvard Case

The central question for the case is the pricing of corporate bonds. The case is designed to introduce these key concepts such as: risk premium, cost of debt, default risk, credit ratings, and credit spreads, bond pricing, credit market, and risk-return. (Please also refer to the textbook chapters on bond valuation, and risk and returns etc.)

What is going on at Roche?

Is this an easy time to be going to the public bond market with a massive offering? (Hint: See Exhibit 5, 7 & 8.)

How do we assess the impact of the bond offering on Roches credit rating and default risk? (Hint: It is critical to assess the post-deal risk. What are the prevailing spreads for non-Roche bonds? Do you think these spreads are similar to investors required yield for the Roche bonds? You need to compute the leverage ratios in Excel Table 1 and refer to Exhibit 9 to make a recommendation for an appropriate rating for the bond.)

How do we estimate the risk premium associated with the estimated default risk? (What is your specific recommendation for the coupon rate for the Roche 10-year, and 30-year U.S. dollar bonds? One way to estimate the required premium for the Roche bonds is the prevailing average spreads for U.S. industrial bonds. Compute the bond spread. Refer to Table 2-5 in Excel.)

Ratio and Pro-Forma Analysis of Selected Comparable Companies Data for 2008 (in millions of U.S. dollars) Note: Because the Genentech financial figures are already consolidated in the Roche financial statements, only the debt and interest expense is expected to vary. The pro-forma interest expense is based on an arbitrary 5% interest rate. Data source: Capital IQ and case writer analysis. ROCHE HOLDINGS AG: FUNDING THE GENENTECH ACQUISITION story of U.S. Bond Spreds for 30-Year Maturities from February 2006 to February 2009 Datastrean, Mergeat Bond Record ROCHE HOIDINCS ACE FINDINR THE. CENNNTECH ACOIISITION AAAIndustrial:90Industrial:114Industrial:170 AA Industrial: 202 Industrial: 204 Industrial: 242 Pfizer: 139 AA-Novartis:186S.Plough:253Novartis:218S.Plough:286S.Plough:224 A+ Industrial: 226 Industrial: 226 Industrial: 242 \begin{tabular}{c|c|c|c|} \hline A Industrial: 277 & Industrial: 275 & Industrial: 263 & J. Deere: 309 \\ AT\&T: 303 & AT\&T: & AT\&T: & \\ & Verizon: & Verizon: & \\ \hline \end{tabular} A- Industrial: 286 Industrial: 284 Industrial: 273 VW: 361 BBB+ Industrial: 406 Industrial: 406 Industrial: 394 Anheuser: 343 McKesson: 384 McKesson: 380 BBB Industrial: 424 Industrial: 418 Industrial: 411 Imp Tobacco: 483 Altria: 449 Altria: 571 Altria: 609 BBB- Industrial: 520 Industrial: 509 Industrial: 506 BB- Warner: 785 Data source: Compustat. ROCHE HOLDINGS AG: FUNDING THE GENENTECH ACQUISITION Terms for Currency and Maturity of Bond Offering Tranches Ratio and Pro-Forma Analysis of Selected Comparable Companies Data for 2008 (in millions of U.S. dollars) Note: Because the Genentech financial figures are already consolidated in the Roche financial statements, only the debt and interest expense is expected to vary. The pro-forma interest expense is based on an arbitrary 5% interest rate. Data source: Capital IQ and case writer analysis. ROCHE HOLDINGS AG: FUNDING THE GENENTECH ACQUISITION story of U.S. Bond Spreds for 30-Year Maturities from February 2006 to February 2009 Datastrean, Mergeat Bond Record ROCHE HOIDINCS ACE FINDINR THE. CENNNTECH ACOIISITION AAAIndustrial:90Industrial:114Industrial:170 AA Industrial: 202 Industrial: 204 Industrial: 242 Pfizer: 139 AA-Novartis:186S.Plough:253Novartis:218S.Plough:286S.Plough:224 A+ Industrial: 226 Industrial: 226 Industrial: 242 \begin{tabular}{c|c|c|c|} \hline A Industrial: 277 & Industrial: 275 & Industrial: 263 & J. Deere: 309 \\ AT\&T: 303 & AT\&T: & AT\&T: & \\ & Verizon: & Verizon: & \\ \hline \end{tabular} A- Industrial: 286 Industrial: 284 Industrial: 273 VW: 361 BBB+ Industrial: 406 Industrial: 406 Industrial: 394 Anheuser: 343 McKesson: 384 McKesson: 380 BBB Industrial: 424 Industrial: 418 Industrial: 411 Imp Tobacco: 483 Altria: 449 Altria: 571 Altria: 609 BBB- Industrial: 520 Industrial: 509 Industrial: 506 BB- Warner: 785 Data source: Compustat. ROCHE HOLDINGS AG: FUNDING THE GENENTECH ACQUISITION Terms for Currency and Maturity of Bond Offering Tranches