Case Study
Hybrid Bonds in Acquisition Finance

Prof. Ian Giddy, New York University

May 2006 -- in Italy’s biggest-ever deal in the United States,  Rome-based Lottomatica, which runs the Italian "Lotto," one of the largest lotteries in the world, agreed to acquire US-based Gtech Holdings Corp., the world’s largest online lottery operation, for $4.8 billion. In addition to $484.5 million to be paid in cash, the acquisition was financed in three separate financing transactions arranged or underwritten by Credit Suisse Group and Goldman, Sachs & Co:

    *      €1.4 billion rights offering extended to Lottomatica's shareholders, including QIBs in the United States
    *      €750 million offering by Lottomatica of Interest-Deferrable Step-Up Capital Securities (also known as "hybrid" debt)
    *      $2.3 billion Senior Credit Facility extended to Lottomatica's US acquisition subsidiary

The merger created one of the world's leading gaming solutions providers, operating in more than 50 countries.

Press report on the deal:

LONDON, May 10 (Reuters) - Italian lottery company Lottomatica on Wednesday raised 750 million euros ($959.3 million) via a heavily oversubscribed hybrid bond that will help finance its acquisition of U.S. gaming giant GTech. Lottomatica said in a statement that the bond, which matures in 60 years but can be called by the company in 10 years, pays a coupon of 8.25 percent and was four times oversubscribed.

Hybrid bonds -- which combine features of debt and equity -- have become a popular tool for corporate treasurers looking to boost a company's balance sheet while supporting its credit rating. That makes them particularly suited to merger and acquisition financing. In Lottomatica's case, its corporate ratings from Standard & Poor's and Moody's Investors Service are set to remain in investment-grade territory after the GTech acquisition, while the hybrid bond itself is rated in "junk" territory.

Lottomatica agreed in January to buy GTech for 4 billion euros ($5.12 billion) in cash to create the world's biggest lottery operator. The financing also includes a $2.76 billion syndicated loan, which the company said on Monday was about twice oversubscribed, and a 1.4-billion-euro rights issue.

The yield on the bond, which was priced at par, came in at the low end of the range of 8.25 to 8.5 percent given ahead of pricing and equates to a spread of 405 basis points over swaps. Credit Suisse, as sole bookrunner, and Goldman Sachs managed the bond sale.

If the bond is not called after 10 years, the coupon switches to floating rate and steps up 100 basis points to 505 basis points over Euribor, a banker familiar with the sale said. The final maturity date of the bond is in 2066. The bond rose sharply after being freed to trade, a trader in London said, and was bid at 102.375 percent of face value by 1415 GMT.

Lottomatica's bond is rated BB+ by Standard & Poor's and Ba3 by Moody's Investors Service, respectively one and three notches below investment grade. The company itself is rated BBB by S&P and Baa3 by Moody's Investors Service. S&P has said it is likely to cut Lottomatica's rating to BBB-, the bottom of investment-grade, once the GTech acquisition is completed, while the bond rating is set to fall to BB.

Read this article: "Are Hybrid Bonds the Next Big Thing in Acquisition Finance?" (lottomatica-hybrids.pdf)


1. Why did Lottomatica use this form of financing?
2. What is the status of this kind of hybrid bond used in an acquisition, from the point of view of the rating agencies?
3. Assume you have to give a summary of the Lottomatica bond to your investment committee. How would describe the bond?
4. What is the legal status of the hybrid investors in the event of liquidation? | | | | contact
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