BREAKINGVIEWS-Everything Everywhere LBO: someday, somehow?

Mon Jun 18, 2012 9:08pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Quentin Webb

LONDON, June 18 (Reuters Breakingviews) - It sounds more 2007 than 2012. But even if markets aren’t quite ready for an 8 billion pound ($12.5 billion) buyout of Everything Everywhere, it could make sense someday, somehow. Britain’s biggest mobile operator would be a rare investment opportunity, and the sector is beloved by both private equity firms and debt investors.

Tom Alexander, who stepped down as chief executive last year, is reportedly trying to line up backers for a buyout. The pitch should find an audience: mobile companies are cash cows, and it’s rare for a big opportunity like this to come up in Europe - especially one that hasn’t previously been through the PE wringer.

However, parents France Telecom and Deutsche Telekom seem reluctant to cede a powerful position in Britain, and might only exit for a knockout price. The sheer scale is another big headache. A transaction would probably entail about 3 billion pounds of equity finance, and 5 billion of debt. So every possible funding source would need to be tapped.

Even the biggest PE firms would struggle to deliver that kind of equity ticket without making their funds dangerously dependent on one deal. But consortium deals have fallen out of favour: running a company in tandem with rivals is a recipe for deadlock. Unorthodox sources of capital would need to tapped: perhaps major fund investors, such as sovereign wealth funds.

Debt would also be less than straightforward. Apax’s recent buyout of Orange Switzerland came with borrowings of about 3.8 times EBITDA, according to Thomson Reuters LPC. A similar multiple here, with 2011 EBITDA of more than 1.4 billion pounds, implies a maximum 5.3 billion pounds of leverage. Debt investors like telecoms, but this would be a stretch.

Banks would front the biggest single chunk. The high-yield bond market, which has alternated between boom and despondency in recent years, would also need to be open. The smallish sterling “junk” market could take a slice, but U.S. bond investors could also provide $1 billion or more - helped by their experience of investing in Virgin Media, a British media outfit that borrows in dollars. More costly mezzanine debt could round things out.

For now, a deal looks implausible. But Alexander could line up equity backers and then wait for a window where the firm's parents are receptive to an offer and the bond market is supportive. Then everything could change.

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CONTEXT NEWS

- Tom Alexander, the former chief executive of Everything Everywhere, has been working on a potential 8 billion pound

($12.5 billion) buyout of Britain’s biggest mobile-phone operator, according to reports in several British newspapers. KKR and Apax, the private equity firms, are backing Alexander’s potential bid, the Sunday Times reported.

- However, Reuters, citing investment banking sources, said Alexander approached private equity groups six months ago about a buyout but found no takers. France Telecom said “no offer from a third party to acquire the business was received, nor has one been invited”, adding the shareholders were “100 percent supportive of the group, its management and strategy.

- France Telecom FTE.PA and Deutsche Telekom (DTEGn.DE) combined their British arms in 2010 to create Everything Everywhere, which has more than 27 million customers. However, the tie-up has taken longer than expected to generate a planned 3.5 billion pounds in cost savings. Alexander quit as chief executive last year.

- Gervais Pellissier, France Telecom’s chief financial officer, told a Reuters summit on June 13 that the two owners could look at an initial public offering (IPO) if the unit was “really on the right track in terms of synergies”. However, he added: “But the partners need to distinguish between the short-term value we could get from an IPO or a sale, and the long-term value of being number in the UK for the two companies.”

- Reuters: Bankers sceptical over British mega-mobile deal [ID:nL5E8HG33X]

- Reuters: REUTERS SUMMIT-Everything Everywhere could float stake-F. Tel [ID:nL5E8HDGID] - For previous columns by the author, Reuters customers can click on [WEBB/]

(Editing by Chris Hughes and David Evans)

((quentin.webb@thomsonreuters.com)) Keywords: BREAKINGVIEWS TELECOMS/

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