Case study

 The Deleveraged Buyout of Invitel Hungary

by Professor Ian H. Giddy
New York University

Questions:

  • What was the economic rationale for this leveraged acquisition?
  • How could such an acquisition be financed?
  • Why was deleveraging necessary, and how was it achieved?

The Deal

In early January 2003, France’s heavily indebted operator of fixed line services, Vivendi Universal, agreed at last to sell its Hungarian arm Vivendi Telecom Hungary Rt. (VTH), to be renamed Invitel. Many local observers saw the move as an important step in the long-awaited consolidation of Hungary’s alternative telecoms market. Whether the development was a milestone or not is open to debate. The continued hold on power of the Hungarian fixed line telecoms market by incumbent Matáv Rt. reduced the significance of the Vivendi deal to something more like a scrap for the best of the thin 15% slice of market share not held by Matáv.

While Vivendi Universal was said to have estimated the value of their Hungarian unit - the second largest fixed line telecoms provider in Hungary - at close to USD 450 million, the VTH transacton value was €325 million. The financing included a €350 million loan facility.

"They’re buying the cash flow," says Bob Creamer, telecoms analyst at Raiffeisen Centrobank in Vienna. "Without the need of a great deal of investment, they can just sit back and watch the money coming in, and this means profit relative to their investment."

The Players

Vivendi Telecom Hungary held a leadership position in nine concession areas, counted approximately 12% of Hungary’s fixed lines and was Hungary’s second largest fixed line telecom operator after the incumbent Matáv. VTH offers fixed line residential and commercial phone services, including nationwide Internet access to over half a million residential subscribers and more than 20,000 business customers.

One of the two announced buyers of VTH was AIG Global Investment (Hungary), a member of the private equity group of AIG Global Investment Group, Inc., which has almost USD 5 billion in emerging market funds.

The second buyer, GMT Communications Partners, was a leading European private equity specialist in the communications sector. The partners of GMT had worked together since founding Europe’s first communications fund, Baring Communications Equity Limited, in 1992, and had created three funds over the intervening years, making more than 20 investments across 13 countries. These included Internet Network Services (UK), Media Publications (France), Mobifon (Romania), EUSA (Spain), Quote (Netherlands), Orion Publishing (UK), PEPcom (Germany) and Nexus (UK). Three quarters of GMT’s investors were major pension funds, international banks, endowments, charitable trusts and other financial institutions, while the remainder were industry entrepreneurs that owned or had owned major communications companies.

VTH was renamed Invitel Távközlési Szolgáltató Rt.

The Deleverage

The terms of this deal included a reduction of the company's debt, by €315m.

"We knew the company had very high leverage, so the key would be to seek approval from the banks for this deal," said Zbigniw Rekusz, who came from AIG as acting CFO of the renamed Invitel. "At a pretty early stage, we got in touch with the banks (a consortium of 14) and asked them what their criteria would be for approval of the deal. The message was clear—decrease the leverage."

Having secured a deal with the vendor and the banks to reduce debt and improve the loan terms (Rekusz won't give details of the terms), the company then concentrated on slashing operating expenses, the biggest chunk coming from a headcount reduction from 1,200 to 850. Top management had to go too.

"Unfortunately, one of the consequences of an extended selling process is that the existing management loses focus," Rekusz says. The relationship between the new owners and management has also changed. "They had guys flying in from Paris with different powers, reporting back to headquarters. It created different lines of responsibility and confusion." Now, lines of reporting are much simpler. "We have a management board and a board of directors." EBITDA in 2004 was up by about €10m to €75m.

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