Tech

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

TDC looks an unlikely candidate for a leveraged buyout.

The Danish telecommunications company underwent the private equity treatment a decade ago, when it was the subject of what was then Europe's biggest leveraged buyout. TDC's financial performance has since deteriorated.

Yet the stock shot up 9 percent on Friday after the company confirmed it had rebuffed an approach, said by the Borsen newspaper to be from U.S. private equity firm Apollo Global Management.

Buyout Bounce
TDC surged on reports Apollo is interested in the Danish phone company
Source: Bloomberg
Intraday times are displayed in ET.

For a deal to stack up, Apollo would need to do more than the cost-cutting that characterized the last buyout -- there would have to be operational and financial wizardry on top.

Telecommunications and cable companies have long been a favored hunting ground for buyout firms because their usually stable cashflow makes it easy to add debt, boosting returns for their owners.

TDC is another matter. Ebitda fell from 10.3 billion kroner ($1.53 billion) to 9.8 billion kroner between 2012 and 2015.

Apollo calls itself a contrarian, value-oriented investor. Maybe it sees a bargain. Just before the Borsen report, TDC's shares were trading at 32.55 kroner -- 43 percent below their five-year high -- giving the company a market value of 26 billion kroner.

Sea of Troubles
TDC's market value has dropped by almost 30% in the past 12 months
Source: Bloomberg

Even after Friday's jump, TDC has a price-to-earnings ratio of just 13, against a peer average of 22, and enterprise multiple of 6.9, also a discount to the sector.

Moreover, Apollo might not have to pay a high premium. Investors bought shares from TDC's former private equity owners for 51 kroner each back in 2010, but have received dividends since. Even a cheeky deal at 40 kroner a share, a modest 23 percent premium to Thursday's close, would leave them in the black. Such an offer would equate to an enterprise value of about 65 billion kroner. Perhaps 75 percent of that, or 48 billion kroner, could be funded by debt, leaving TDC with leverage of five times trailing Ebitda (high, but not unheard-of, for an LBO in the telecoms industry). That would require an equity check of 16.9 billion kroner.

There's a snag. To get a 15 percent internal rate of return on that over five years would require selling TDC on for at least 80 billion kroner (assuming no dividends are paid and debt remains flat). This would demand a huge uplift in Ebitda -- or an exit at a higher valuation multiple.

Given Denmark is seen as one of the world's most unattractive telecoms markets, that strains credulity. Revenue and profit have been falling across the industry for years, and an effort to consolidate down from four to three mobile providers was scotched last year by Europe's antitrust regulators. What's more, it's hard to believe TDC's previous private equity owners have left much efficiency to be extracted.

Where else might Apollo reap some value? One clue is that the firm is a credit expert. Possibly, it could refinance TDC's existing borrowings and sit on the asset for a few years until an industry buyer like TeliaSonera makes an offer (if regulators allow it).

It's a tall order, even if private equity firms have a lot of firepower and a shortage of targets. But Apollo might reasonably assume it won't find itself facing any other bidder.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net