(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Quentin Webb
LONDON, Feb 18 (Reuters Breakingviews) - A 10-billion-pound
leveraged buyout of Britain’s biggest mobile operator would be
dazzling in its sheer ambition. But the payback would be more in
short-term glory than long-term financial returns.
Two teams – KKR (KKR.N) and Apax, and rivals CVC [CVC.UL]
and Blackstone (BX.N) – are dusting off old deal dossiers. It’s
easy to see why these and other buyout shops may be circling.
Debt is cheap and plentiful. Big M&A is stirring. And EE’s
parents, France Telecom FTE.PA and Deutsche Telekom
(DTEGn.DE), have put the parent of Orange and T-Mobile UK in
play by talking about a potential float.
A deal would be a milestone: not just another huge British
takeover soon after Virgin Media VMED.O, but also Europe’s
biggest LBO since Lehman Brothers collapsed. The snag is that
it’s hard to see how it could deliver the 20 percent-plus
returns that buyout investors expect.
The widely cited 10-billion-pound ($15.5 billion) price tag
looks like a non-starter. That would entail a monstrous 2.3
billion pounds in equity and bid costs – assuming the sellers
helpfully kept 20 percent of the shares for themselves. Even if
debt worth 5.5 times EBITDA was available at an all-in cost of
6.5 percent, the annual return, for a 2018 sale at the same exit
multiple, would hit only 15.3 percent. Moreover, this
calculation requires the dark arts of private equity to reduce
EE’s tax bill to almost zero, allowing all of EE’s prodigious
cashflow to pay down debt after meeting investment and interest
A more conservative assumption might be an 8-billion-pound
takeout funded 30 percent with equity, and debt of 4.1 times
EBITDA. That would imply a price of 5.8 times forward EBITDA. A
sale at 10 billion pounds – producing a similar exit multiple -
would return an annualised 17.6 percent over five years. The
equity required would still be hefty.
Scraping under the usual return hurdle might be acceptable
for a banner deal in a low-yield environment. But the current
owners may balk at selling EE at a sub-20 percent premium to
rival Vodafone’s (VOD.L) lowly market multiple.
So an EE LBO seems to work only with a bargain purchase
price and masses of cheap leverage. A float is still the more
Run the numbers: link.reuters.com/pyr95t
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Calculator: Everything Everywhere LBO link.reuters.com/pyr95t
- For previous columns by the author, Reuters customers can
click on [WEBB/]
(Editing by Chris Hughes and Sarah Bailey)
Keywords: BREAKINGVIEWS EE/CALCULATOR/
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.