Capital Markets

Kind of a Drag: Altria Raises $6B, But at What Price?

The cigarette maker pays the price for issuing debt in a tough market. Meanwhile, Wells Fargo raises more capital, and restructures its Wachovia de...
Stephen TaubNovember 6, 2008

Today’s Altria bond deal is further proof that a company with a relatively high credit rating is able to raise money in the current environment — if it is willing to pay a hefty price.

The world’s largest cigarette maker sold $6 billion of senior notes in three parts, according to a report from Reuters. However, the company — rated Baa1 by Moody’s, Triple-B by Standard and Poor’s, and BBB-plus by Fitch — wound up shelling out 600 basis points over Treasuries for each of the three maturities.

Altria sold $1.4 billion of five-year notes priced to yield 8.512 percent, $3.1 billion of 10-year notes priced to yield 9.711 percent, and $1.5 billion of 30-year bonds, priced to yield 10.196 percent. Citigroup Global Markets, Goldman Sachs and JPMorgan were the joint bookrunning managers for the sale, said Reuters.

Interestingly, the sell-off in Altria’s common stock has pushed up its dividend yield to 6.70 percent.

Meanwhile, Wells Fargo & Co. on Wednesday evening said it is planning a $10 billion common stock offering. The bank expects to use the proceeds from the offering for general corporate purposes, which includes shoring up its capital position that will be weakened when it completes its acquisition of Wachovia Bank.

JPMorgan Securities Inc. is acting as global coordinator for the offering, and Goldman, Sachs, Morgan Stanley, UBS Investment Bank, and Wachovia Securities are joint bookrunning managers.

Last week Wells Fargo announced that it would restructured the Wachovia deal, reportedly to make sure the transaction remains tax free, says Robert Willens, a tax expert and head of consultancy Robert Willens LLC. On October 31, Wells Fargo revealed in a regulatory filing that it would structure the Wachovia acquisition as a forward merger so it qualifies as a tax-free reorganization. Originally, the transaction was set up to be a reverse triangular merger — a typical way of achieving the government’s tax-free blessing. But the reverse triple play would not have worked in this instance, says Willens.

A reverse triangular merger, in this case, would have required a newly-created subsidiary of Wells Fargo to merge with Wachovia — with Wachovia emerging as the surviving corporation. In the transaction, the former shareholders of the surviving Wachovia would have exchanged a certain amount of stock for voting stock of the controlling corporation — Wells Fargo. In most cases, by meeting the controlling interest test, the transaction would have maintained its tax-free status.

But the “control for voting stock” requirement would not have been met in this particular case because according to the original deal, classes of non-voting preferred stock of Wachovia were being exchanged for non-voting preferred stock of Wells Fargo. That non-voting, non-controlling stock transfer would have constituted a taxable exchange, insists Willens.

So Wells Fargo chose to restructure the deal as a two-party forward merger, in which Wachovia common stock will be exchanged for 0.1991 of a share of Wells Fargo common stock, and each share of Wachovia’s preferred stock will be converted into a share of Wells Fargo preferred — having rights, privileges, and terms identical to the corresponding Wachovia share. That structure should not have any problem passing the tax-free status test used for forward mergers, which is: Establish a “continuity of interest” regarding the stock transfer, concludes Willens.

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