Business Context and Reporting Period
This Form 8-K, filed on May 25, 2011, by Applied Materials, Inc. (Applied), reports the execution of definitive financing agreements to fund the planned acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian) for $63 per share in cash. The filing details the entry into a new bridge loan facility and a revolving credit agreement, as well as the termination of a prior credit agreement.
Key Financial Metrics and Agreements
- Bridge Loan Facility: A $2.0 billion unsecured term loan facility entered into on May 25, 2011, with JPMorgan Chase Bank, N.A. as administrative agent. Funds are intended to finance a portion of the cash consideration for the Varian merger.
- Revolving Credit Facility: A $1.5 billion four-year unsecured credit agreement entered into on May 25, 2011. This includes a $400 million sub-facility for letters of credit.
- Outstanding Debt: As of the filing date, Applied has not received any borrowings under the Bridge Loan Agreement or the new Credit Agreement.
- Interest Rates: Both facilities bear interest at various rates selected by Applied plus an applicable margin based on Applied's public debt rating.
- Covenants: Both agreements require the maintenance of a ratio of consolidated funded debt to consolidated funded debt plus consolidated shareholders' equity.
Material Changes Versus Prior Period
Applied terminated its prior five-year $1.0 billion Credit Agreement (originally dated January 26, 2007, and amended in 2009) on May 25, 2011. This prior agreement was due to expire on January 26, 2012. There were no outstanding amounts due under the terminated agreement at the time of termination. The new $1.5 billion Credit Agreement replaces the prior facility, increasing the available revolving credit capacity by $500 million.
Outlook, Risks, and Contingencies
- Merger Funding: The new financing is contingent upon the closing of the Varian acquisition. Unused commitments under the Bridge Loan Agreement will expire on the earlier of the Merger Closing Date or April 30, 2012.
- Events of Default: Both agreements contain customary events of default, including failure to comply with covenants, inaccuracy in representations, failure to pay financial obligations, change of control, and insolvency events. An event of default would permit lenders to terminate commitments and demand immediate repayment.
- Prepayment Requirements: Applied is required to prepay Bridge Loans with net proceeds from asset sales, property loss recoveries, and new debt or equity issuances.
- Regulatory Process: The filing notes that Varian intends to file a proxy statement with the SEC, and security holders are urged to read it carefully.
Investor Verification Checklist
- Verify the final terms and interest rate margins of the Bridge Loan and Credit Agreements in the filed exhibits (10.1 and 10.2), noting that confidential treatment was requested for redacted portions.
- Monitor the status of the Varian merger closing to determine if the $2.0 billion bridge loan will be drawn.
- Review Varian's upcoming proxy statement for details on the merger transaction and potential risks.
- Track Applied's public debt rating, as it directly influences the interest margins on the new facilities.
- Confirm compliance with the debt-to-equity ratio covenants in future quarterly reports.