Case study

 Financing the Kabel Deutschland Acquisition

by Professor Ian H. Giddy
New York University


  • What kind of debt/capital ratio might work for this acquisition?
  • How could the bridge loan be securitized?
  • What was the acquisition financing, and how was it paid off?

Deutsche Telekom may close cable sale this week

FRANKFURT June 2003 -- Germany's Deutsche Telekom AG could close the sale of its cable television business, Kabel Deutschland, to a consortium as early as Monday after the buyers secured financing for the deal, a newspaper said on Friday.

Citing industry sources, the German daily Frankfurter Allgemeine Zeitung said in its Saturday edition financing would be provided by US banks Goldman Sachs and Morgan Stanley through a bridge loan that would then be securitized.

Deutsche Telekom agreed in January to sell its cable TV assets for 1.725 billion euros ($1.9 billion) to help the stricken telecoms giant cut its 64-billion euros debt mountain.

It said it would sell its cable TV assets to a consortium including Apax Partners, Goldman Sachs Capital Partners and Providence Equity. -- Reuters

Background Articles

European Venture Capital Journal

After a comparatively barren 2000 and 2001, the number of leveraged buyouts in Europe’s telecom sector has increased in the past year. Recent LBOs include those of Deutsche Telecom’s six remaining domestic cable TV assets (€1.725 billion), France Telecom’s Telediffusion de France towers business (€1.6 billion), its Dutch cable TV operator Casema (€665 million) and its stake in satellite Eutelsat (€447 million),
Deutsche Bank’s TeleColumbus (€500 million), Alcatel’s services business and Callahan-owned Telenet’s €1.4 billion purchase of Flemish cable network Mixed Intercommunales.

Although in part a continuation of the new European corporate strategy of divesting non-core assets to focus and expand on one or two main sectors, these disposals are mainly driven by the telecom giants’ attempts to reduce their vast debt mountains and so improve their credit ratings. Private equity houses perceive a sizeable window of bargain hunting opportunity in Europe’s telecom sector and are capitalising on the steady stream of distressed sale situations. “Europe’s telecom sector is volatile and in volatility there is opportunity for private equity houses. Overall, it is still a growth sector and fundamentally robust so we are still keen to invest in it,” says Wilson.

Given the debt-saddled state of trade buyers, with Vodafone one of the very few telecom companies still making acquisitions (these are mostly limited to buying out fellow shareholders in various European joint ventures), the sponsors do not have to worry about being out-bid by strategic buyers and can therefore push even harder on prie.

The larger telecom assets coming up for sale are perceived as more stable, safer investments due to their market share and standing and are therefore attracting financial sponsors. “Although there is not much competition for telecom firms in the €50 million to €250 million category, competition is intense for firms in the $500 million plus range. Prices are still at an all time low, but private equity houses aiming to put money to work in €500 million plus deals are likely to force prices higher in this segment of the market,” says Nic Humphries, director at HgCapital.

Divestments by the likes of France Telecom, Deutsche Telekom, KPN and BT, which have the sole aim of reducing debt, have tended to comprise cable units, tower and mastassets and telephone directories. This leaves the telecom giants to focus on fixed and mobile telephony.

 Apax Partners

After the acquisition, the consortium named a new management team led by Roland Steindorf, Chief Executive; Christof Wahl, Chief Operating Officer; and Paul Thomason, Chief Financial Officer.

Its new owners put in place a new management team and invested in KDG’s infrastructure to help it compete with new means of delivering TV signals to households.  As part of its investment program, KDG has been investing in the roll-out of digital TV and high-speed internet, which is expected to lead to further growth and profitability.

Kabel Deutschland (KDG) is the largest European cable TV network, supplying about 10 million German households in 13 German states with TV signals.

Kabel Deutschland GmbH Announces Results for the Quarter Ended June 30, 2004

Highlights for the quarter include

- Core sales increase slightly to EUR 254.7 million
< style="font-family: helvetica,arial,sans-serif;">- Operating income (1) increases by approximately 67.7% from prior year <>to EUR 20.1 million
- EBITDA (2) increases by approximately 5.0% to EUR 103.2 million from <>prior year
- EBITDA margin (3) increases to 39.1% from 36.7% in prior year
- Cash Flow from operating activities increases by 161% to EUR 55 million <>from prior year

Unterfoehring, August 16, 2004 - Kabel Deutschland GmbH (KDG), Germany's largest cable operator, today announced quarterly results for the period ended June 2004 that highlights an increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to EUR 103.2 million, an improvement of 5% compared to the same quarter in 2003. For the trailing four quarters ended June 30, 2004, KDG reports EBITDA from continuing operations of approximately EUR 410.6 million.

Roland Steindorf, CEO Kabel Deutschland commented on the results that "We have continued both operational and financial improvements as a result of our fundamental repositioning of Kabel Deutschland into a marketing and sales organisation since March 2003. We streamlined our cost structure, actively managed our client base, soft launched a new digital TV offering, Kabel Digital Basic, and introduced a High Speed Internet offering. The Company improved its EBITDA margin in the quarter to 39.1% from 36.7% last year, reflecting an improved quality of the revenue stream and the cost reductions made to date. We are committed to unlocking the real value of the German cable network, and our customer increase and financial improvement show that we are on the right track."



Revenue is comprised of core sales and other non-operating revenue. The dominant component of revenue is Core Sales, which increased slightly to EUR 254.7 million for the quarter ended in June 2004 compared to EUR 253.0 million recorded in the same quarter in 2003. Total revenue declined by 1.3% to EUR 263.9 million for the quarter ended June 30, 2004, primarily caused by the decline in other non-operating revenue.

This resulted in an improved quality of the revenue stream with 96.5% of total revenue derived from core sales activity during the quarter compared to 94.5% during the same period last year. Other indicators of the improvement in revenue quality includes the reduction in bad debt provisions which in the quarter ended June 30, 2004 declined by 40% to EUR 4.5 million or 1.7% of core sales from EUR 7.5 million or 2.8% of core sales in the same period last year.

Earnings before interest, tax, depreciation and amortisation (EBITDA)

EBITDA for the three months ended June 30, 2004 increased by 5.0% to EUR 103.2 million from EUR 98.2 million for the quarter ended June 30, 2003. The slight decline in total revenue was completely offset by significant cost cuts obtained in the digital playout facility, bad debt provisions, facility rent and other cost and expense items. A portion of these cost savings were redirected into marketing and sales activities which increased significantly in the quarter ended June 2004. The remainder of the savings translated into improved operating performance. The EBITDA margin increased to 39.1% from 36.7% reflecting the improved quality of the revenue stream and the cost reductions made to date.

Net result

The company reports a decline in the net loss for the quarter by approximately 77.7% to EUR 4.3 million from EUR 19.3 million in the same period last year. Included in the loss is approximately EUR 2.0 million related to the first time acquisition of TKG Saar. The improvements in operating results coupled with a 13.5% decline in interest expense to EUR 28.8 million and a slight improvement in income from deferred taxes for the quarter ended June 2004 contributed to the improvement. The decline in interest expense was the result of the recapitalisation of the balance sheet which occurred at the end of March 2004. While the average outstanding indebtedness increased to EUR 1,645 million for the quarter ended June 30, 2004 from EUR 1,609.8 million for the quarter ended June 30, 2003, the weighted average interest rate declined as a result of retiring loans which had higher average interest rates.

Cash Flow

Cash Flow from operations for the quarter ended June 30, 2004 was approximately EUR 54.8 million, an improvement of 161% compared to last year. Included within cash flow from operations as a use of cash was a seasonal increase in working capital of EUR 22.4 million related to the high level of annual bills sent to subscribers in the first quarter of each year. Cash flow from operating activities was sufficient to cover cash used in investing activities of EUR 33.8 million including capital expenditures of EUR 16.2 million, the acquisition of TKG Saar of EUR 10.2 million, the investment in I.T. software of EUR 3.6 million and capitalised fees and expenses of EUR 3.8 million related to the potential acquisition of the three unaffiliated regions. Cash balances increased by EUR 20.6 million to EUR 205.3 million during the quarter ended in June 2004.

Capital expenditures were primarily centered in investments in the level 3 CATV network to extend reach and compete for in-house contracts. Capital expenditures are expected to increase as the Company moves forward with its network extension and upgrade plans associated with all three of its product lines, analogue TV, digital TV and HSI.

Balance Sheet & Liquidity

Total indebtedness at June 30, 2004 was EUR 1,645 million. The Company had approximately EUR 205.3 million of cash. Based on these balance sheet components, net debt to EBITDA for the LTM (7) approximated 3.5 times, which is well inside of existing leverage levels in the Company's Senior Bank Facility. The Company also has liquidity available under its revolving credit facility. At quarter end, EUR 50 million of availability existed.

At June 30, 2004, the Company had in place a EUR 2,600 million Senior Credit Facility (outstandings at June 30, 2004 were EUR 1,370 million) and a EUR 1,575 million Subordinated Bridge Facility (outstandings at June 30, 2004 were EUR 275 million). The substantial unused availability will be used to fund the proposed acquisitions of the three regional operating cable companies. We expect that, if we consummate these acquisitions, the Company's leverage level as measured by Total Debt to EBITDA and Senior Debt to EBITDA will increase to approximately 5.75 times.

Paul Thomason, CFO Kabel Deutschland, commented that "increased efficiencies from the centralisation of back offices and merger of systems have yet to be fully reflected in the business results. As expected additional savings are generated in operations, increased funds can be reinvested into growth products and services in analogue, digital and HSI."

Subsequent Events

On July 2, 2004, the Company issued EUR 250 million 10.75% Senior Notes due 2014 and $ 610 million 10.625% Senior Notes due 2014. The proceeds were used to repay all outstandings under the Subordinated Bridge Facility and temporarily repay approximately EUR 475 million of the Senior Bank Facility. The Senior Bank Facility may be redrawn to fund the acquisitions in the fourth quarter. | | | | contact
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