Bonds star in Liberty Global's Unitymedia takeover
* Liberty taps high-yield bond market, by-passes banks
* Bond financing for M&A deals set to rise
By Alex Chambers
LONDON, Nov 13 (Reuters) - Liberty Global (LBTYA.O) has turned to the high-yield bond market to buy Unitymedia GmbH [UNTMDA.UL], in the first major European deal where high-yield bonds have usurped bank loans to fund an acquisition.
The German cable company itself is being used as an issuance vehicle to fund the purchase before the deal actually closes.
The acquisition's total consideration is $5.2 billion, consisting of equity at 2 billion euros ($3 billion) and existing debt of 1.5 billion euros.
UnityMedia had been poised to launch a 500 million euro initial public offering (IPO) -- arranged by UBS (UBSN.VX), Morgan Stanley (MS.N) and Credit Suisse (CSGN.VX) -- on Friday in what would have been Europe's first private equity-led offering. The financial sponsors' approach might be seen as dual-track but it is clear the planned IPO flushed out Liberty Global.
Unitymedia said Liberty Global had first approached the company three weeks ago, but a person familiar with the matter said Liberty had been interested for at least 18 months.
"Liberty was aware that once Unity Media is public, it's much more difficult to buy it," he said.
LIMITED BANK CAPITAL
Bank loan funding constraints for acquisitions have contributed to the low level of M&A in 2009. Funding for jumbo leveraged buyouts and trade purchases has dwindled.
High-yield bonds have not been used extensively by European companies for acquisition financing before.
The most notable bond financing linked to an an acquisition was the $16 billion raised for Roche (ROG.VX) early this year but that was for one of the world's best-rated companies.
Investment banks in the past have provided bridge loans for leveraged deals prior to these being taken out via syndicate loans, mezzanine and high-yield debt. UnityMedia is using only the high-yield market.
In addition to the losses banks suffered through poor investments, the credit credit crunch created a $70 billion loan overhang in Europe alone.
Officials at banks working on the 2.5 billion euro bond deal expect it to be completed within a matter of days.
Liberty Global has mandated Credit Suisse, Goldman Sachs, Deutsche Bank and JP Morgan to run the bond sale.
There are two parts to the deal; a 1.9 billion euro equivialent senior secured eight-year offering, non-callable for the first three years, in the name of Unitymedia Hessen GmbH, and a 600 million 10 year, non-callable for five years, via Unitymedia GmbH.
These two entities are the issuers of Unity's current senior secured and unsecured debt. Using the same issuers means any outstanding credit default swaps on Unitymedia will not be orphaned -- a situation where there is no underlying reference entity to the CDS.
Outstanding Unity debt will be refinanced.
The structure of the transaction is relatively straightforward and ringfences the German-based cable operations from Liberty Global's other European businesses such as UPC.
UNITYMEDIA RELEVERED
Unitymedia has 1.5 billion euros of outstanding debt, meaning that as well as supplanting the loan market, this deal raises 1 billion euros of new money, once existing debt is refinanced, which will fund part of the equity consideration.
The buyout deal offers the financial sponsors a 100 percent clean exit at a premium price -- at an enterprise value of 3.5 billion euros, Unity Media is now valued at over 8 times its forecast 2009 earnings before interest, tax, depreciation and amortisation (EBITDA), analysts said.
Prior to Liberty's purchase, the leverage was 6 times EBITDA. Telenet (TNET.BR), a European rival, trades at about 6.5 times EV/EBITDA.
Bankers said the deal was a positive signal, showing how a sophisticated industrial investor was willing to pay more than the public market.
It also signalled another step in the credit market recovery. Until now, the European high-yield market's success has largely been driven by extending bond maturities and refinancing existing credits.
Bankers said while banks remain hamstrung, the use of bond financing for the purchase of entities that possess business models and cashflows that are easily understood, was likely to rise. (Additional reporting by Daisy Ku in London) ($1 = 0.6722 euro)
