Deal: Buy-out of IPC
Amount: £860 million
Announced: January 5
Lead equity sponsor: Cinven
In late December 1997, Cinven, one of the largest independent private equity investors in Europe, ran a spoof advert in the financial papers boasting that no firm had closed more deals on Christmas day than it had. It was meant as a joke. No-one has ever closed a major acquisition on Christmas day. But the joke almost backfired as Cinven came close to that unenviable distinction with its £860 million ($1.4 billion) buy-out of UK consumer magazine business IPC from Reed Elsevier.
Cinven was given the go-ahead to tie up the deal after it submitted the most attractive of 10 bids from various media groups and financial investors on December 19 last year. Following some frantic work over the Christmas holiday, it closed the deal on January 5, leaving some competing bidders dumbfounded that an auction they had thought was just entering its second round was in fact over.
Cinven, like a lot of other interested potential buyers, had been tracking IPC for a couple of years, as Reed Elsevier began concentrating purely on business and technical publishing and disposed of its consumer businesses.
What attracted Cinven and other bidders including UK publishers Emap and Mirror Group and international media companies Bertelsmann, Hachette and Time Warner were the very strong brands in the IPC list of titles. Of its 69 titles, 20 were 50 years old and several, such as Country Life and The Field, had endured for over 100 years. Complementing these are some of the more successful launches of recent years such as women’s fashion and beauty magazine Marie Claire, launched in 1988, and Loaded, which revolutionized the men’s lifestyle market segment following its launch in 1994. What’s on TV, launched in 1991, is the biggest-selling magazine in Britain, with a circulation of 1.7 million.
Brian Linden, director at Cinven, says: “This company has an unbroken growth record going back 10 years. Even if it only achieves 50-60% of that growth rate, our deal still performs nicely.”
Despite the launch of titles such as Loaded, IPC has a reputation for being a little sleepier than its nearest rival, Emap. Perhaps Reed, knowing that it would not hold on to IPC for long, had become reluctant to fund new launches or acquisitions. Cinven, according to Linden, will support both and this explains the reasonably conservative capital structure of the buy-out with £315 million in equity and £580 million in debt. “We wanted to be sure the company has a robust enough financing structure to reinvest in the business, so that when we come to float it [probably in four to five years’ time], it will be a healthy company with lots of new titles coming out that will command a high price/earnings multiple. There is funding set aside in the model to increase the rate of new title launches.”
Mindful that it did not want to tie up management in a lengthy disposal of IPC while at the same time merging with Wolters Kluwer, Reed was ready to pounce early on any compelling offer. “To create total flexibility for Reed, the initial work went much further than the normal stage-one work,” recalls Simon Warshaw, head of the media sector team at SBC Warburg, Reed’s advisers. “The deadline for first offers was December 19 and by then a draft sales contract was available, we had a fully rehearsed two-and-a-half hour management presentation, an accountant’s long form report finalized and data room ready.”
Reed wanted a clean deal with as short as possible a period from exchanging contracts with a buyer to completion. It was wary of facing competition issues and monopoly referrals which might have accompanied a sale to a trade buyer like Emap, which is also strong in TV listing magazines and women’s titles in the UK.
Warshaw says: “Alongside the trade, we were very conscious of large pools of private capital looking for strong businesses with stable cashflows. So we played to two audiences trade buyers and financial buyers and created a process and information package with both in mind.”
On December 19, when SBC Warburg and Reed opened the 10 letters containing expressions of interest from potential payers it was, says Warshaw, “very clear that Cinven had done an enormous amount of work and were prepared rapidly to deliver an unconditional deal on superior terms”. Within 48 hours of opening the initial letters, Reed entered into an exclusive arrangement with Cinven. If it could come up with the necessary financing by January 5, IPC would be in its pocket.
By now Reed and its advisers were playing a subtle game. Most bidders had assumed that Reed would consider the expressions of interest over the holidays and in early January would proceed to a conventional second round, with a short-list of preferred bidders offered additional due diligence and encouraged to fine-tune their bids. Reed now intended to sell to Cinven. But had Cinven somehow failed to put its bid together, Reed had the safety net of being able to pick up the process with the other bidders.
Determined to press its advantage, Cinven now worked overtime through the Christmas holidays with its advisers at Salomon Smith Barney and with another key participant in the drama, its debt adviser and provider Goldman Sachs. Goldman underwrote £400 million of senior bank debt which it is in the process of syndicating among a small group of senior underwriters before launching a more general syndication. Terry Hughes, co-head of European leveraged finance at Goldman Sachs International, is confident this will succeed because of the inherent attractiveness of the business and the importance of Cinven. “We had about 20 calls from banks on the day after the deal was announced asking about getting in. Any bank which wants to build a leveraged finance unit and plenty do right now will have to have exposure to Cinven and this is a way for them to achieve that.” Goldman expects, at the close of general syndication, to hold as much debt as any other bank in the syndicate.
Even more important to the financing of the deal is the £180 million high-yield bond that IPC will launch this month. Cinven may have led the largest European MBO this decade, the £1.1 billion acquisition of British and French hospital and healthcare businesses from Générale des Eaux, but it has never done a highyield bond, relying instead on senior bank debt and mezzanine for debt financing.
For now, Goldman is supplying $180 million of funding as mezzanine debt on its own balance sheet. This will be refinanced with a 10-year high-yield bond incorporating a five-year zero-coupon structure. “An important lesson of this deal is that returns can be much better for equity investors on deals with a big high-yield bond component than on deals with mezzanine,” says Robin Doumar, co-head of European leveraged finance at Goldman.
