Equity Fund Promises Gone Wrong Leave TDC Owners Counting Losses

When TDC A/S was sold by a group of private equity funds five years ago, they marketed the Danish phone company as a yield stock that acted like a bond.

Investors should have ignored them, and bought the actual bond instead.

The TDC stock has crossed a milestone, though not the good kind. The company has now delivered shareholders a loss, even including dividend payments, since it was sold back to the market by a group of private equity funds. The stock is down 36 percent since Dec. 9, 2010. Take dividends into account, and the loss gets pared to 8.5 percent. If you annualize that, it becomes a 1.7 percent loss over the period.

But investors who have held the company’s bonds over the same period are still making a profit. And TDC’s plan to lower dividends and cut costs should support the bonds in the future, Mads Rosendal, a credit analyst at Danske Bank, said in a note published Wednesday and repeated a market-weight recommendation on the bonds.

“TDC has been cutting its dividend to bail out the bond owners, which is fair enough, because share owners know that it’s unacceptable for TDC to lose its investment grade,” Michael Friis Joergensen, an analyst at Alm. Brand Bank, said by phone.

TDC’s owners in 2010 (KKR, Apax Partners, Blackstone Group, Permira Advisers and Providence Equity Partners) promised to return 80 percent to 85 percent of free cash flow to investors in the form of dividends over the following years.

But since they exited the company, it has slashed its dividend policy. On Wednesday, it said it will drop a 1.5 krone payout that had been promised to shareholders for 2015. TDC also abandoned any plans to make interim dividend payments.

When asked for comment, TDC’s press department in Copenhagen referred to Wednesday’s statement, which said the company has an “ambition” to increase dividends from 2017 and that it still has wants to give shareholders an “attractive return.”

“We can now safely say that the expectations for dividends that the private equity owners created were way too high,” Joergensen said. “But in fairness, they probably couldn’t have predicted that the competition in the Danish mobile phone market would turn out to be this fierce and kill domestic growth for TDC.”

In 2011, as the private equity owners were selling down their stakes at profits, TDC described itself as a “yield stock with dedicated steady dividends based on a highly attractive shareholder remuneration policy.” On Wednesday, the company said its dividends will be “subject to financial performance, investment needs and investment grade rating commitment.”

TDC can no longer be considered a dividend stock, according to Joergensen.

“The share is priced somewhere in between a dividend stock and a possible takeover candidate,” he said.

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