SFR Takeover Battle Seen Offering Boon for Lenders: Euro Credit

The takeover battle for Vivendi SA’s SFR unit, the biggest contested bid in Europe since Royal Bank of Scotland Group Plc captured ABN Amro Holding NV in 2007, is a boon to loan bankers starved of deals for the past six years.

Competing offers from billionaires Patrick Drahi and Martin Bouygues for the French phone carrier are each backed by at least $11 billion of debt from lenders eager to fund the deal. It’s the busiest start to the year for mergers and acquisitions in Europe since 2007, according to data compiled by Bloomberg.

“Investment banks are in for a fee bonanza,” said John Foy, the London-based head of leveraged finance at Prudential Plc’s M&G Investments, which manages more than 242 billion pounds ($404 billion). “People have felt a lot more comfortable about investing in Europe and banks are confident they can place the debt.”

Drahi’s Altice SA is using nine banks to fund his $20 billion bid using debt, cash and equity, people familiar with the matter have said. A 14.5 billion-euro ($20 billion) counter offer from Paris-based Bouygues SA is funded by HSBC Holdings Plc, which has underwritten 10.5 billion euros of debt, according to a statement yesterday. The bank also offered Bouygues a 1.5 billion-euro credit line.

Europe Sentiment

Companies in Europe held back from acquisition deals and built up cash during the recession, with members of the Stoxx Europe 600 Index accumulating almost $1 trillion of cash by the end of November, according to Bloomberg data. Sentiment toward European debt has improved as the region recorded three consecutive quarters of growth to the end of last year.

The cost of insuring speculative-grade corporate debt against losses is the lowest since 2007, with the benchmark Markit iTraxx Crossover Index of 50 companies falling to 254 basis points.

Lenders including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley have agreed to take part in the financing for Drahi, the people familiar with the matter said. If he succeeds, the deal would be the biggest leveraged buyout financing in Europe since Alliance Boots Holding Ltd. raised 9 billion pounds in 2007, the same year RBS and its partners beat Barclays Plc to buy ABN Amro for 72 billion euros.

Investment Grade

The offer for SFR from Martin Bouygues’ construction and telecommunications group would create Europe’s seventh-largest phone company, according to a statement on its website. The acquisition financing has been structured “to give the new entity the means for its development and investment grade status,” it said.

Loan financings for mergers and acquisitions by investment-grade companies in the region shrank to just $22 billion in 2013, less than a 10th of the figure at the market’s 2007 peak, according to data compiled by Bloomberg. More than 80 percent of loans obtained by Europe’s high-grade companies last year were to refinance debt, the data show.

“Debt and equity markets have been and remain exceptionally strong,” said Jim Esposito, the London-based head of Goldman Sachs Group Inc.’s financing group in Europe. “What has changed is that the more stable backdrop is allowing companies the ability to forecast further out into the future, which provides the ability to explore more transformational combinations.”

Landscape ‘Competitive’

Companies in the U.S. have taken advantage of investors’ willingness to back acquisition deals. Verizon Communications Inc.’s $130 billion buyout of its wireless joint venture with Vodafone Group Plc, which completed last month, included more than $49 billion in bonds, the biggest company debt offering ever. Cerberus Capital Management LP’s $9 billion deal to merge Safeway Inc. with Albertsons is backed by about $7.6 billion of financing, according to a statement from the private-equity company.

Altice sold $1.7 billion of high-yield bonds in December to fund its acquisition of Orange SA’s unit in the Dominican Republic and a month later raised about 1.3 billion euros in an initial public offering. The operator of phone carriers from Israel to Portugal can issue new shares starting 45 days after the flotation if the proceeds are used to finance a merger or acquisition, according to regulatory filings.

“Banks recognize the willingness of European corporates to start investing again in M&A, so the landscape for lending has become increasingly competitive,” said Laurence Hollingworth, head of industry coverage for EMEA at JPMorgan Chase & Co.

Seventy percent of executives expect takeover deals to increase this year according to a Feb. 25 survey from law firm DLA Piper LLP of 250 market participants, compared with 51 percent in last year’s poll.

“There’s been a dearth of M&A for the past five years so the banks that get back into the mega-deals get great credentials from doing it, great experience and good fees,” said Pip McCrostie, the global vice-chair for transaction advisory at EY, the company formerly known as Ernst & Young. “Banks obviously want a slice of that action.”

Before it's here, it's on the Bloomberg Terminal.