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Credit Insights

Companies Acquire Competitors in a Muddling Market

Deals will affect bondholders in different ways. Plus, get our take on the eurozone bailout and the eleventh hour of U.S. debt ceiling negotiations.

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One of the themes we have highlighted this year is that management teams are concentrating their efforts on increasing shareholder value. Considering that top-line growth is stagnant as the economy muddles along, and increased productivity is increasingly harder to generate, management teams are turning to acquisitions to expand their businesses.

Several deals were announced last week that affect bondholders in different ways. On the positive side,  Petrohawk (ticker: HK, rating: Suspended), which we had rated BB before the deal, announced that it had accepted an offer to be acquired by  BHP Billion  (BHP). The Petrohawk bonds traded up significantly on the news as BHP is one of the world's largest miners and has investment-grade-type credit metrics. Similarly,  Nalco (ticker: NLC, rating: Suspended), which we previously rated BB+, agreed to be acquired by  Ecolab ECL. Nalco bonds traded up significantly on the news, as Ecolab also has investment-grade-type credit metrics. To the downside,  Express Scripts  (ESRX), which we previously rated A-, announced its intention to acquire  Medco Health Solutions (ticker: MHS, rating: Under Review), which we had previously rated A-. The bonds for both issuers traded down on the news as investors became concerned about the amount of debt leverage the combined entity would employ to consummate the merger.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.