UPDATE 2-Liberty Global plans bonds to finance Virgin acquisition

Wed Feb 6, 2013 6:33pm GMT

Quotes

   

* Liberty Global announces GBP2.3bn four-part bond financing

* Virgin Media leverage to rise only modestly

* Bankers upbeat about M&A outlook (Recasts with M&A outlook, adds quotes, loan details)

By Natalie Harrison

LONDON, Feb 6 (IFR) - Financing plans for the multibillion-pound acquisition of British cable group Virgin Media emerged on Wednesday and buoyed hopes that large-scale takeovers are back as companies grow more confident about the economy and take advantage of cheap debt.

On Tuesday, Michael Dell struck a deal to take Dell private for US$24.4 billion in what is the biggest leveraged buyout since the financial crisis, while Liberty Global (LGI) said it would buy Virgin Media for about US$15.75 billion in stock and cash.

"To have two major M&A deals in one week is unbelievable. It's a great vote of confidence," said one senior leveraged finance banker.

Another leveraged finance banker agreed: "This is just what the market needs."

John Malone's LGI on Wednesday announced a four-tranche GBP2.3 bln-equivalent high-yield bond and the syndication of a GBP2.3 bln-equivalent term loan B, part of a total GBP2.925 bln-equivalent loan supporting the buyout.

It has mandated Credit Suisse as a global coordinator and Barclays, BNP Paribas, Bank of America Merrill Lynch and Deutsche Bank as joint bookrunners for the bond.

Bankers close to the bond transaction expect the financing to go smoothly, adding that large, liquid deals are something that investors are crying out for.

Virgin Media is one of the biggest M&A transactions in Europe since the 2007 financial crisis.

Including debt, the deal would be worth more than US $23 bln, and is the latest step in LGI's strategy to build its European cable and broadband business which began in 2009 with the acquisition of Unitymedia and was strengthened in 2011 when it bought Germany's Kabel BW from private equity firm EQT.

A healthy European M&A pipeline including both corporates and private-equity owned assets is now building after years of financial market volatility and uncertainty about the economic outlook sidelined Europe.

HEALTHY PIPELINE

Leveraged buyouts for energy-metering firm Ista, French catering business Elior and German media company ProSiebenSat.1 are all up for grabs and include billion-plus debt packages.

"There is more of a leap of faith that the economy is improving and that both buyers and seller can make money from acquisitions. There's also more confidence that instead of sitting on cash from a sale, that the money can now be deployed as more opportunities spring up," the first banker said.

Strong demand for two LBO deals last month - for Cerved and DuPont - resulted in the timing on the first brought forward and the latter rejigged to lower the overall cost of financing.

Some market participants raised concerns about high single name exposure in the cable sector due to LGI owning a large majority of the biggest players - Kabel BW, Telenet, Unitymedia and UPC.

Although one banker said investors could demand a premium on the new bonds for that reason, another pointed out that there was no cross-default risk as each company is financed on a standalone basis and is therefore ringfenced.

European and U.S. fixed income investor meetings for the bonds will be taking place on Wednesday and Thursday with pricing due on Friday, but the loans will price next week.

The bond offering will be split between sterling and dollars and will consist of GBP1.717 bln-equivalent senior secured bonds and GBP 578 mln-equivalent senior notes. Expected ratings are Ba3/BB- for the secured notes and B2/B for the senior.

The new bonds will be issued by special purpose vehicles Lynx 1 Corp and Lynx 2 Corp.

The secured notes are expected to be split between eight-year non-call four GBP1.1bn and USD1bn tranches, while the senior notes will be split between 10-year non-call five GBP300m and US $450 million tranches.

SHEDDING MARKET RISK

LGI is also asking Virgin Media's existing bondholders to waive their rights to ask the company to repurchase existing bonds maturing in 2018, 2019 and 2021 as a result of a change of control covenant that has been triggered by the acquisition.

If bondholders agree to that, the bonds will remain in place.

It will eliminate the risk that a new capital structure would have to be put in place if the market deteriorates before the acquisition closes and the bonds fall below the 101 change-of-control trigger.

All of those bonds are currently trading well above par.

LGI is offering a cash incentive to bondholders to agree to the waiver.

"Liberty wants to eliminate that market risk now. It makes sense to raise new bonds and loans now, and then let the proceeds sit in escrow until the acquisition goes though," said another market source close to the transaction.

It is less clear what strategy bondholders will take on the existing 2022 bonds, which have traded at 98, according to the source.

Leverage at Virgin Media will increase from 3.1 times to 3.4 times on a secured basis and four times on an unsecured basis, which is relatively conservative.

That is partly because sterling interest costs are slightly higher than in euros and dollars.

The final sizes of the loans will depend on the outcome of a bondholder consent solicitation, which closes on Feb. 14. If more bondholders agree to waive their rights for the issuer to repurchase bonds, the loan proceeds will be repaid to investors, one source said.

Liberty also said it plans to launch a two-year, US$3.5 bln share buyback program after the deal closes.

LionTree Advisors and Credit Suisse advised Liberty Global, while Goldman Sachs and JP Morgan are Virgin Media's advisers. (Reporting by Natalie Harrison, additional reporting by RLPC's Isabell Witt; editing by Alex Chambers, Julian Baker)

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