5 Min Read
* Planned portability features make M&A easier
* Italian mobile market badly in need of consolidation
* PIK toggle structure also accommodative to M&A
By Robert Smith
LONDON, March 21 (IFR) - Wind's recently announced refinancing will include new debt clauses allowing for a sale or merger of its business, lowering the barriers for badly needed consolidation in an Italian mobile market ravaged by a year long price war.
Wind's owner VimpelCom is using the refinancing to tackle the Italian firm's burdensome payment-in-kind (PIK) bonds and extend its maturity profile.
But it is also aiming to insert portability clauses into Wind's loan documentation that would allow the debt to stay in place after a change in company ownership.
"The portability feature, implied by the provisions that waive the change of control, signals to the market that VimpelCom does not want to raise the barriers to M&A discussions through this loan refinancing," said Mitch Reznick, co-head of credit at Hermes Fund Managers.
Reznick said he would not be surprised to see similar features in the pending bond deal.
"It is an important signal and makes perfect sense, because the Italian market is crying out for consolidation."
The four-player Italian mobile market saw intense price competition in 2013, which Wind says reached the "highest level of aggressiveness" during the summer.
Telecom Italia first lowered its price, followed by Vodafone and then Wind. Hutchison-owned 3 Italia has continued to undercut the market.
"This price war is unsustainable for all the players," Telecom Italia's then chairman Franco Bernabe said in August. "The others are suffering as much or more than we are."
Just two months later Bernabe stepped down from his post after six years at the helm, having lost the support of core shareholders.
Wind is amending its Senior Facilities Agreement, which lenders must consent to by April 2, with features that allow the debt to stay in place after a change of control under two scenarios: if net total debt is below 4.25x and senior secured leverage below 3x, or if Wind is taken over by a listed company with a greater or equal market capitalisation to VimpelCom, with mobile licences in the EU, Canada, Switzerland and/or the United States.
Vodafone, 3 and Telecom Italia all have greater market caps than VimpelCom.
But given the four players' market shares, however, investors say that Hutchinson's 3 Italia is the most plausible candidate.
According to Wind, Telecom Italia is market leader with 34.1% share, followed by Vodafone with 31% and Wind with 24.3%. In contrast, 3 Italia has just 10.6% market share.
"Given their woeful market share, Hutchison has to do something or get out," said one high-yield investor.
The key question is whether VimpelCom would prefer to dispose of Wind outright or share ownership with another player.
"No one can be sure, but I think that VimpelCom doesn't want to do a sale outright, because it would be reverting back to a mostly Russian business," said another investor.
VimpelCom generates 70% of its revenues in emerging markets, so Wind provides valuable diversification, especially given recent instability in its key markets of Russia and Ukraine.
"The problem is, if you look at what Hutch did in Ireland and Austria it's clear they like to take control," the investor said. "There's going to be tough decisions, but ultimately in a year's time this is unlikely to remain a four-player market."
Wind has also mooted an alternative structure, which also has a clear eye on M&A prospects.
Under the first plan, VimpelCom would refinance all of Wind's 1.3bn PIK notes by injecting 500m of cash and then raising 3.7bn of new Wind senior notes and using 51m of cash on balance sheet.
Under the alternative, following the cash injection, the remaining PIK notes are refinanced with new PIK toggle notes.
PIK toggles are a variation of PIK notes that pay coupons in cash if the issuer can, while leaving it the option of allowing interest to accrue on the principal if it cannot.
Wind explains that this option may be used "in case flexibility is required for potential M&A." PIK toggles usually have short one- to two-year call protection, which makes them easier to refinance in the event of a buy-out. (Reporting by Robert Smith; editing by Alex Chambers, Marc Carnegie)