No Convergence

The Danish Exception

TDC shows M&A in in the industry isn't all about convergence.
Photographer: Chris Ratcliffe/Bloomberg
At Closing, February 21st
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At Closing, February 21st
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The slow money has won a victory. Monday's agreement to sell Denmark's TDC A/S to a group of local pension funds and infrastructure specialist Macquarie Infrastructure and Real Assets proves European telecom companies aren't all condemned to be converged with their telephone, broadband and media peers at home and abroad.

The buyers want to invest in TDC's infrastructure to deliver high-speed internet to every household in Denmark. They are seeking the backing of other local utilities in the project too.

Shares Jump

TDC stock surged after the company agreed to be bought by a group of funds

Source: Bloomberg

This laser-like focus on the local network is in sharp contrast to where TDC appeared to be headed. The group was moving down the convergence path with a plan, now scrapped, to pay 19.6 billion-kronor ($2.4 billion) for the Nordic entertainment assets of pay-TV specialist Modern Times Group AB.

Danish households can cheer that a group of patient and deep-pocketed investors want to improve their surfing speeds. TDC shareholders won't be grumbling either. The 50.25 Danish kroner-a-share offer is pitched at a 32 percent premium to TDC's volume-weighted average price in the three months before takeover interest emerged -- reasonable compensation for surrendering control. TDC's ability to get to that price with its current strategy looks highly doubtful.

Don't expect a gatecrasher. A buyer from inside the industry would need big synergies to make the near 62 billion-kroner total expense cover TDC's cost of capital even after five years.

How can the consortium justify such a deal when it brings no synergies to the table? The real comparison is with what a private equity fund might do.

Macquarie and its partners are probably seeking to make a 10 to 15 percent internal rate of return over about a decade -- about half what a buyout firm seeks over twice the typical holding period. They must be assuming that, with some extra leverage and time to let capital expenditure pay off, it ought to be possible. That rests on the belief that it's possible to have as much confidence in the cashflow from the broadband business in 10 years time as from a toll road or other utility.

The deal also throws a spanner in the works of the European telecoms convergence story. A combined TDC and Modern Times Group might have been target for Tele2 AB, once the Swedish mobile group wraps up its planned purchase of Com Hem Holding AB.

Swedish investment giant Kinnevik is backing Tele2's Com Hem deal, owning stakes in both companies. It had also cheered on the purchase of Modern Times, where it is the biggest investor.

Tele2's investors may be relieved that Macquarie and its friends have now taken a pricey acquisition off the table.

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

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