Last updated: February 6, 2013 3:31 pm

Buyout firms seek funds for £10bn EE bid

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EE (Everything Everywhere) store, a joint venture between France Telecom SA and Deutsche Telekom AG©Bloomberg

Buyout firms have accelerated talks with lenders to secure funding for possible £10bn ($15.7bn) bids for EE, the UK’s largest mobile phone operator, in what would be the biggest private equity-backed acquisition in Europe since the financial crisis.

The efforts have picked up in intensity in the past week amid buoyant credit markets and in the wake of mega deals such as the $24bn buyout of Dell, raising hopes a debt package of up to £7bn could be raised to fund such an acquisition, people with knowledge of the talks said.

A group formed by Apax and KKR and another led by Blackstone and CVC Capital Partners are working on competing offers, these people said, adding that the firms are looking at scenarios where they would use about £3bn of their own equity to fund the deal.

The firms are likely to seek co-investments from their own fund investors, they said.

In a move mirroring the Dell deal, the potential bidders are also working on plans that would see EE’s owners France Telecom and Deutsche Telekom keep a stake of 15 per cent to 20 per cent. All this would help reach the ambitious acquisition price.

A leveraged buyout of this size involving several firms would be reminiscent of the mega-buyouts done during the credit boom in 2006 and 2007. A £10bn LBO of EE would the largest such deal in Europe since KKR took UK pharmacy chain Alliance Boots private in 2007 for £12bn. It would also be the largest private equity deal in European telecoms since the acquisition of a controlling stake in TDC, Denmark’s largest phone company, by a group including Blackstone, Apax, Permira and KKR in 2006.

Lending banks are looking into the issuance of a US high-yield bond as part of the debt package to fund a bid for EE – formerly known as Everything Everywhere – to tap much stronger US credit markets. Talks with banks are advanced but are limited by the fact that the private equity firms have not yet had access to detailed financial information about the company, a condition to table formal bids, the people cautioned.

France Telecom and Deutsche Telekom, of which Blackstone owns 3 per cent, have said since last autumn that they are working on an initial public offering of their UK unit.

The private equity firms have since circled EE without being able to get a competitive financing package, but the strong recovery in credit markets in the US and in Europe in recent months has dramatically changed that perspective. Typically buyout firms use a third of their own funds to pay for acquisitions, using debt to finance the rest.

An IPO of EE remains the owners’ preferred option, but if private equity firms manage to meet their price expectations with fully-financed offers France Telecom and Deutsche Telekom would be expected to consider a straight sale, people close to the situation said.

A spokesman for Deutsche Telekom said: “Deutsche Telekom and France Telecom remain long-term partners in EE. [We] are very confident in the management strategy, which aims to strengthen EE’s leading position in the UK. In that respect [we] have decided to conduct a strategic review on the asset and consider different options with an IPO as the preferred option.”

Gervais Pellissier, deputy chief executive of France Telecom, said last November that there “could be some space” at the end of this year for a flotation. He added that the parent companies would remain the majority controlling shareholders.

EE, which was created through the merger of Orange and T-Mobile’s UK arms, is nearing the end of a three-year restructuring plan that aims to to deliver cost savings of £3.5bn.

Telecoms businesses are attractive to private equity given the normally high levels of cash generation, as well as the opportunity to cut costs through network sharing and consolidation.

EE is in the midst of bidding for 4G spectrum in the UK, which could cost as much as £1bn. However, it has had a head start after it agreed with regulators last year to use some of its existing spectrum for superfast mobile broadband.

Apax, Blackstone, CVC and KKR declined to comment.

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