They say that imitation is the sincerest form of flattery, but there are (admittedly few) circumstances in which investment bankers do not like to be flattered. One such circumstance is when corporates take some of their best ideas and use them to devise financing strategies of their own.
UK telecoms operator BT Group looks as if it might be doing just that. In announcing the second-quarter results last month, BT chairman Christopher Bland let slip that the firm was looking at opportunities both to increase debt capacity and lower the cost of its debt. And for a firm with steady, utility-like cashflows such as BT’s it doesn’t take a rocket scientist to figure out the likely plan: a securitization. A securitization would certainly achieve aims one and two but it could also achieve a third one – that of blocking a potential hostile bid from a private equity or infrastructure fund buyer.
The appetite among financial buyers for large businesses with steady, regulated cashflow is now unprecedented (see Behind infrastructure’s gold rush, December 2006). Not surprisingly, given its scope and scale, BT is persistently a potential target. And in the wake of the kind of feeding frenzy that has surrounded BAA and Thames Water recently, that is certainly not going to change.
The ever-escalating multiples that have been bid for LBO targets worldwide have been made possible by the refinancing options (such as securitization) on offer in the capital markets. Eye-watering cost savings can be achieved by refinancing expensive acquisition debt, and the market has witnessed a stream of LBO deals that are structured around this concept (see LBO sponsors look to ABS financing solutions, October 2006).
But by loading itself up with a nice cheap, chunky slug of debt via just the technique that the LBO buyers have used to such advantage, BT will be able to improve shareholder returns and dampen down the arbitrage opportunities that those private equity and infrastructure funds find so attractive. This debt will most probably be secured on the company’s Openreach network access division, which was created in 2005. Regulated utilities in the water sector have used securitization to run at leverage multiples approaching 100% debt/regulated asset base (RAB). But even if BT operated at a lower level of 85% it could still raise more than £9 billion ($17 billion) by securitizing Openreach (Openreach contributes around 35% of ebitda and has a RAB of £11 billion).
If BT does securitize Openreach, it will not be the first time that the technique has been used defensively. When UK supermarket chain J Sainsbury announced a £2 billion CMBS transaction earlier this year, the move was immediately interpreted as a poison pill designed to tie up the firm’s property assets and dissuade a private equity bid. As financial buyers become more and more voracious in their pursuit of regulated opportunities, securitization might come to play a part in both the (hostile) buyer and target’s financial strategies. And, as ever, it will be the banks that pick up the fees – but sometimes by making sure that an LBO deal doesn’t actually happen.
