A major European telephone company agreed to be bought by a group of private equity firms for approximately $12 billion, in an all-cash deal that could set new rules for how such sales are negotiated and make them more palatable to a broader swath of public companies.
Private equity firms -- which use money from institutional investors, endowments and pension funds to purchase companies -- have been a growing force in the world of mergers and acquisitions on both sides of the Atlantic in the past two years. By teaming up, the firms have been eyeing ever-larger companies, such as car-rental giant Hertz Corp., an arm of Ford Motor Co. that was the target of a private equity offer in September.
The agreed acquisition of Danish telecommunications company TDC A/S by a group of five private equity firms pushes the potential size of deals even higher. After including about $3.6 billion in debt that the firms will purchase, the total value of the deal reaches $15.6 billion -- the largest private equity buyout since the $25 billion buyout of RJR Nabisco of the United States in 1988 and the largest ever in Europe. The way TDC negotiated with the private equity firms also could serve as a playbook for bigger deals in the future.
From the start, TDC's directors made it clear to the consortium that it would not enter negotiations unless the private equity group acted like a public company, not a private investment fund. They limited the amount of nonpublic information available to the purchasers because different rules apply to public-company negotiations. They restricted the firms' ability to get out of the deal once an agreement had been reached. And they ensured TDC bondholders will be treated more favorably than in similar deals in the past.
"This deal and its reception shows there is capacity to do deals of this size and complexity and sets the stage for other deals of this magnitude," said Lawrence Slaughter, head of financial sponsors deals in Europe, the Middle East and Africa at J.P. Morgan.
Taking on larger acquisitions also increases the risk for private equity firms. After cutting costs and restructuring their purchases, private equity firms then look to sell them for a profit three to five years later. But coordinating the management and sale of a company among five private equity groups is difficult.
And the radical cost-cutting typical of private equity firms is likely to be a lot tougher at larger companies. The private equity firms buying TDC already have agreed that the company's current management can stay in place, and the potential for further layoffs is expected to be restricted by a "truce" the company has with its unions.
"We will increasingly see these transactions," said Andre Jaeggi, a managing director at Adveq Management AG in Zurich, a firm that manages $1.8 billion invested in private equity funds.
"The question is: What can they achieve, particularly in a big syndicate of buyers? It's unproven," he said. "It's more difficult to achieve a clear plan with five partners than with just one or two."
Aided by abundant credit at relatively low rates and plenty of targets in both the United States and Europe, private equity acquisitions have soared in the past two years, including many purchases of telecommunications companies.
Private equity deals accounted for 20 percent of all deals in Europe last year, at $146 billion, up from just 5 percent, or $60 billion, in 1999, according to research firm Dealogic. So far this year, private equity firms have been even more active, having announced $174 billion of deals in Europe. But as acquisitions by public companies have picked up this year, private equity deals have slipped to 18 percent of the total of nearly $1 trillion in announced European deals.
In the United States, $131 billion of private equity deals accounted for 15 percent of the total mergers and acquisitions in 2004. That is a huge increase from the industry's 3 percent market share in 1999. So far this year, $127 billion of private equity deals amounts to 13 percent of the total.
The private equity group that agreed to purchase TDC of Copenhagen comprises Apax Partners Worldwide LLP and Permira Advisers KB of the United Kingdom, and Blackstone Group International Ltd., Kohlberg Kravis Roberts & Co., and Providence Equity Partners Ltd. of the United States.
TDC operates fixed-line and mobile networks in Denmark, Switzerland, Germany, Britain and many other European markets. Analysts say the Danish business has too many employees, especially as its fixed-line business dwindles.
But the group agreed to retain the existing management and continue largely with the company's existing strategy. Chief Executive Henning Dyremose said the company has reduced its work force to 15,000 from 17,500 and will continue to cull staff. "But we try to do it in a gentle and kind manner," he said.
The private equity funds also offered to buy all of TDC's $3.7 billion of bonds at par, or the value at which they would be repaid at maturity, something never before done in Europe. That move, which will be costly, wasn't required under the bondholders' agreements, said Leandro de Torres Zabala, an analyst at Standard & Poor's.
He and others said this deal is probably an effort to avoid the fate of an earlier private equity acquisition in Denmark where bondholders suffered losses and sued the buyers. The two sides settled in October for undisclosed terms, but the dispute held up the deal for five months.
The private equity group was advised by J.P. Morgan Chase & Co., Enskilda Securities and Deutsche Bank AG. Bech-Bruun and Simpson Thacher & Bartlett were legal advisers. TDC was advised by Goldman Sachs Group Inc. and law firms Kromann Reumert and Clifford Chance.