Record-breaking Numericable bond heralds increase in European M&A

By:
Peter Lee
Published on:

Numericable and Altice attracted overwhelming demand for the largest-ever high-yield bond offering to fund the acquisition of French mobile phone operator SFR from Vivendi. Even more remarkable than the financing was the take-over battle that led to it. The availability to leveraged acquirers of such high volumes of funding at low spreads will energize the European M&A market.

Don’t be fooled by the $100 billion order book for the three-tranche, dual-currency Numericable junk bond issued yesterday. Bankers close to the deal freely admit that investors, in their desperation to be allocated assets with a decent yield, over-inflated their orders for the $16.7 billion combined offering.

However, the deal was a monster by any measure, the largest high-yield bond ever. Very robust financing markets in Europe are now influencing the reshaping of European corporates in potentially surprising ways.

When Vivendi first moved to focus its diverse portfolio of corporate assets and sell French mobile phone operator SFR last year, cable operator Numericable, controlled by French billionaire Patrick Drahi, was not the front-runner to acquire the prize. The early betting was that, in a highly price-competitive French mobile market, a deal could somehow be cleared for the number three and number two ranked operators to merge.

 
Vincent Bolloré, Vivendi chairman
"Think back even to March and the mood music in Paris was still very much that Bouygues should win the battle for SFR," says one banker involved in the deal. "[Vivendi chairman] Vincent Bolloré may be a bit of a maverick but in France what the establishment says often goes. France is quite an insular market that has yet produced a number of national champions that are at or near the top of market capitalization rankings for their sectors in Europe. Many have degrees of state-ownership, support or influence. And SFR is a prize domestic asset."

When news emerged that Vivendi might be inclined to sell to Numericable, the French industry minister Arnaud Montebourg criticized the structuring of Drahi’s interests for tax reasons around an Amsterdam-listed parent company, Altice.

While a sale to Numericable might have been easier to clear on French and EU competition grounds, Vivendi had to weigh that against the risks of opting for a sale to a more leveraged acquirer.

"The M&A tactics made this a very fast moving transaction and one of the absolute requirements for Vivendi to accept the bid was certainty of financing," says the banker. "It was moving so fast that one or two banks were struggling to keep up and secure approvals."

This is where the strength of the high-yield bond markets in Europe became a factor, allowing the banks supporting the Numericable bid to take on big underwriting commitments on the $23.3 billion equivalent M&A deal, with greater confidence of distributing and refinancing these quickly in the markets.

On the same day that BB- rated Numericable issued its record-breaking $10.9 billion deal, B rated Altice also sold $5.8 billion equivalent of high-yield bonds to support the SFR purchase, which itself was close in size to the previous largest-ever high-yield bond of $6.5 billion from Sprint last year.

According to figures from Dealogic, European high-yield issuers have brought a record $67.3 billion to market in 2014 up to April 24, a 69% increase on last year’s $39.7 billion over the same period.

"Bolloré is something of an asset trader himself," says the banker, "and on this occasion the strength of the financing markets allowed him to go against the preferences of the French establishment, get a terrific deal for Vivendi shareholders and still retain a substantial stake in the new company.

"There are a lot of European corporates with business portfolios that need cleaning up. With such robust financing now available to buyers, this may be the time to get on with that task before they find activist shareholders on their registers making a lot of complaints about failure to deliver value."