Lenders offering financing to back the leveraged buyout of Qwest Communications International's directories business are banking that the bidding groups going after the business will help pull the credit through the badlands known as the pro rata market. The buyout, which could top out at $8 billion, figures to pit a sizeable pro rata portion against a market that has been generally weak and unreceptive. Bankers are hoping relationship building and the prospect of future business can ease the way. "The pro rata market is very difficult, and it is a consideration," said one banker who works with financial sponsors. "But the bidding consortium would help. If a bank commits then they have the relationship with four private equity firms. It's getting bang for your buck."
Lehman Brothers and Merrill Lynch are shopping the asset for Qwest and have already come out with a staple-on financing offer that could amount to over six times total leverage for the buyout, said bankers. J.P. Morgan is said to be working with Madison Dearborn Partners,The Carlyle Group, Apollo and Hicks Muse Tate & Furst. The other consortia of buyout firms consists of Kohlberg Kravis Roberts & Co., Providence Equity Partners, The Blackstone Group and Thomas H. Lee Partners. Calls to bankers at Lehman and Merrill were not returned. A spokesman at Qwest declined to comment.
The deal would be the largest LBO since RJR Nabisco, and the prestige/league table card will almost certainly be played by underwriters. "If the business sells for $8 billion an equity investment of $1.5 billion would be accompanied by over $3 billion of senior secured bank debt and an equal dose of bonds," the banker said. "The bond economics will likely be thrown in, and any bank that cares about league tables will consider it critical to be on this deal."
One contrarian-minded banker noted that there are obstacles to the sale. Qwest is said to be seeking a significant down payment for DEX. But the potential buyers are reluctant as the money would be converted into Qwest equity if the bid fell apart. "The sticking point is if Qwest went bankrupt, would they get their money back," said one banker following the situation. Another noted, "If you want to buy a directories business then you don't want a minority stake in Qwest." Also, If DEX is not sold, Qwest will run into a cash crunch, he added.
But most are optimistic the directories business is also very leveragable, bankers said. The business has yearly EBITDA of $1 billion. With 60% percent EBITDA margins and relatively low capital intensity and earnings volatility, the business can support these kinds of multiples, said one banker. Another, referred to Yell Group's highly leveraged acquisition of McLeod USA's telephone directories business. "The Qwest directory business is an exorbitant generator of free cash-flow," he added. "This has a broad utility like cash-flow," said another, adding, the lack of deal flow will also help. Tyco's plastics business got pulled before this and the market will probably not be as excited by the Burger King sale.