Telco takeovers: Will bondholders be protected?
Covid-19 has not put the brakes on deal-making in the European telecommunications, media and technology (TMT) sector and we expect M&A activity to continue. As such, we view the nuances of change of control (CoC) language in deal documents as important. By CreditSights.
We use the “Compare Deals” function, part of CreditSights’ Covenants product, to assess CoC language across four deals from the European HY TMT sector:
· UK broadband provider TalkTalk (TALKLN ‘25s issued February 2020)
· Greek telco Wind Hellas (CRYALM ‘24s issued October 2019)
· Romanian operator Digi (RCSRDS ‘25s and ‘28s issued January 2020)
· Spanish operator Masmovil (LORCAT ‘27s issued September 2020)
The deal comparison table provides an easily digestible overview of CoC language. This includes the applicability of CoC clauses, analysis of portability terms and the identities of the Permitted Holders.
The table presents a few clear takeaways. All four deals have a Change of Control put option at a price of 101. All bar one (RCSRDS) also have leverage based portability clauses, or “specified change of control” events.
Of course, the nuances within each situation include considerations regarding potential buyers and whether or not bondholders would want to exercise their put option. Additionally, when looking at portability language, understanding the definitions of the consolidated leverage ratios will be a consideration.
Below, we complement the output from the Deal Comparison tool with CreditSights’ fundamental analysis, to explore the implications for bondholders.
The TALKLN ‘25s have a CoC put option at 101. A CoC is an event where any person (other than the permitted holders) becomes the beneficial owner of over 50% of the total voting power of the issuer, or where all — or substantially all — of the issuer’s assets are sold to another person other than a restricted subsidiary or one or more permitted holders. Charles Dunstone, who owns a 30% stake in TalkTalk, is a permitted holder.
The TALKLN ‘25s have a one-time portability clause (not present in the preceding TALKLN ‘22s) — providing that the consolidated leverage ratio is less than 3.5 times pro forma for the change of ownership.
We calculate consolidated leverage ratio to be around three times. Thus the portability clause provides some protection against a leveraged buyout by a financial buyer — namely a leveraging transaction from Toscafund, which has launched a preliminary takeover offer for TalkTalk. However, we cannot rule out deal structures which could circumvent this CoC language – namely by retaining Charles Dunstone as an owner of the new holding entity.
The offering memorandum for the CRYALM ‘24s made it clear that Wind Hellas’s two controlling shareholders, GoldenTree (59.3%) and Cyrus (35.6%), were evaluating a sale of their stakes. This remains a dynamic to watch.
The CoC language is similar to that for the TALKLN ‘25s. Permitted holders include GoldenTree, Cyrus and Management Investors. While the portability threshold is higher on the CRYALM ‘24s (the consolidated leverage ratio is less than 4.5 times), bondholders gain additional protection in that more than 35% of the total payable by a new investor must be in the form of equity.
Our concern is that two likely suitors — United Group or Xavier Niel — would likely pursue leveraging transactions. Pre-IFRS 16 net leverage at Wind Hellas (excluding tower sale proceeds) currently stands at 3.4 times. Xavier Niel could push this up to four to 4.5 times, which would stay within the portability threshold and leave CRYALM bondholders in a more levered entity without reducing operating risk.
As for United Group, pre-IFRS16 net leverage through the operating company stands at around 5.2 times. Without a meaningful equity injection, CRYALM bondholders are protected from being ported into the United Group structure.
RCSRDS bonds stand out in that they do not have portability or specified CoC language.
RCSRDS’s CoC clause includes the same language around a sale of all, or substantially all, of the assets to any person other than permitted holders.
For a CoC to be triggered, any person or group, other than permitted holders, only has to own more than 35% of the voting stock of the parent as measured by voting power, not number of shares. This threshold will only apply when permitted holders do not beneficially own a larger percentage of the outstanding voting stock. A CoC will also occur on the first day on which a majority of the members of the board are not Approved Directors.
An Approved Director means any member of the board of directors whose election was approved by either: permitted holders who beneficially own 50% or more of the voting stock of the parent, measured by voting power; or two thirds of the board of directors who are Approved Directors.
In the case of Digi, the permitted holders are Zoltan Teszari and any related person. As of January, Zoltan Teszari owned a 64.8% economic stake and 94.6% of the voting power.
LORCAT bondholders should note that the change of control comes with a one-time portability provision if the consolidated net leverage ratio is no greater than 4.75 times. By our estimates, the ratio is around 4.8 times.
Indeed, since Masmovil issued its new senior secured LORCAT ‘27s on September 24, rumours have surfaced that Vodafone, rated Baa2/BBB, is considering acquiring the company. While we are sceptical of this deal, the Spanish consolidation story is unlikely to go away.
Given its investment grade ratings, an acquisition by Vodafone would be a big win for Masmovil bondholders, so portability language here is not a concern.
Masmovil’s CoC language is otherwise largely consistent with the TALKLN ‘25s — more than 50% voting power, sale of all, or substantially all, of the assets to a person other than permitted holders or a restricted subsidiary.
Permitted holders include certain Cinven, KKR and Providence Equity entities, and their affiliates; senior management with an equity investment in excess of €250k and related persons.
This article was written by Oliver Burke, senior analyst – European TMT, and Mary Pollock, senior analyst - TMT.
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