Debt Under Construction For Skype Deal

Target: Skype Technologies S.A.

Value: $1.9 billion

Sponsors: Silver Lake, Index Ventures, Andreessen Horowitz, Canada Pension Plan Investment Board

Seller: eBay

Lenders: JP Morgan, Barclays Capital, RBC Capital Markets

Financial Advisors: Sponsors: J.P. Morgan, Barclays, RBC Capital Markets; Seller: Goldman Sachs

Legal Advisors: Sponsors: Sullivan & Cromwell LLP, Simpson Thacher & Bartlett LLP, Bird & Bird LLP and Michael Silverleaf QC; Seller: Dewey & LeBoeuf LLP, Sidley Austin LLP

A consortium led by Menlo Park’s Silver Lake is preparing to finance its $1.9 billion cash purchase of 65 percent of Skype Technologies S.A. from eBay.

The debt package is expected to include a $600 million term loan and a $125 million bond offering, while the remainder of the deal will be financed with a sizeable equity slug, according to IFR, a sister publication of Buyouts.

JP Morgan, Barclays Capital and RBC Capital Markets, all of which advised the consortium, have committed to provide the term loan. Goldman Sachs is advising eBay on the deal, which is expected to close in the fourth quarter.

Based in Luxembourg , Skype produces software and provides services that enable users to make free video and voice calls, send instant messages and share files with other Skype users through computers and other devices.

If the deal closes as scheduled, it will be the largest LBO of 2009. Previously that honor would have gone to Kohlberg Kravis Roberts & Co.’s pending deal to acquire Oriental Brewery from Anheuser-Busch InBev for $1.8 billion. KKR was also said to have expressed an interest in buying Skype.

The Silver Lake-led consortium is made up of a mix of European and North American investors, including Switzerland’s Index Ventures, a venture capital firm; Andreessen Horowitz, a relatively new VC firm led by Netscape founder Marc Andreessen; and the Canada Pension Plan Investment Board.

One investment banker, speaking on condition of anonymity, said that the mere presence of venture capital firms in a transaction comprised of almost 40 percent leverage speaks to the company’s growth potential. “The VCs are here because they’re expecting VC-like returns,” the investment banker said.

Skype generated revenues of $551 million in 2008, up 44 percent increase from 2007. Looking forward, investment bank Thomas Weisel Partners estimates $813 million in revenues and $200 million in EBITDA for Skype in 2009, giving the deal a purchase multiple of about 3.4x prospective revenues and 13.8x EBITDA. There is a $300 million termination fee if the consortium backs out.

The remaining 35 percent of Skype not acquired by the consortium will continue to be held by eBay. The online marketplace for new and used goods bought Skype in 2005 for about $3.1 billion. But the synergies originally imagined between the two companies never came to fruition, and eBay initially announced that it would spin off Skype in a 2010 IPO, freeing up the company to focus more intently on its PayPal electronic payments service as well as its flagship auction service. But with the public markets on shaky ground, a traditional sale of the company made more sense.