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The $12bn takeover of TDC will further increase the level of debt being issued to fund acquisitions of European telecoms companies.
A group of five investment banks – JP Morgan, Deutsche Bank, CSFB, Royal Bank of Scotland and Barclays Capital – are preparing to launch a $10bn financing package this week and will provide a combination of senior debt and high yield loans to finance the acquisition.
Investors appear ever-more willing to fund these large telecom deals, because the private equity firms are putting in more equity and can therefore tolerate larger levels of debt.
In addition, in a low interest rate environment debt remains cheap. Investor and lender risk appetite has also increased. Whereas last year the average amount of debt a telecoms buy-out would support was around four times ebitda, today six times is more common – an increase of 50 per cent.
This was demonstrated this year by the €12.1bn ($14.2bn) leveraged buy-out of Wind, the Italian telecom company, by Egyptian entrepreneur Naguib Sawiris.
John Coyle, global head of financial sponsors at JPMorgan, says: “Recent telecom LBOs have had a sensible level of gearing given the increased maturity and stability of their businesses.” For the financial sponsors, these deals are all about financial engineering.
“There is limited organic growth in European telecommunications for the larger incumbents, so the attractiveness for private equity companies lies in clever financial engineering and the amount of leverage in the structure,” says Henrik Aksalken, managing director in European M&A at Deutsche Bank. “The public
markets would not allow these companies to gear up to the levels we are seeing now.”
The deals are providing big fees for the investment banks advising on and financing the deals. According to data from Dealogic, JP Morgan was the biggest recipient of investment banking revenues from private equity, commanding 8.5 per cent of the overall sponsor market so far this year.
JP Morgan also acted as financial adviser and debt provider on the $2bn acquisition of TIM Hellas, the Greek wireless arm of Telecom Italia, in August and acted as adviser to Spain’s Ono in the acquisition of Auna for €2.25bn, as well as raising about €1bn of equity from financial sponsors.
The consortium buying TDC may have succeeded in spending some of their funds, but it will be the returns they make their limited partners when they come to exit the business in three to four years which will matter most.