European leverage on the up: VNU over 7.5x

Indications are mixed as to whether the VNU directories deal will get done. Apax Partners and Cinven are daring to go where nobody else has gone this year. The €2.075bn transaction supporting their purchase of VNU directories is levered at an extraordinary 7.8x, splitting investors down the middle as to whether it will get done.

Naysayers dubbed the deal a reflection of excess liquidity rather than of a company suited to take on so much leverage.

Ratings agency Fitch agreed that the transaction was excessively leveraged.

CSFB, Bank of America, Goldman Sachs and JP Morgan are working hard to bring in Dutch banks to create momentum ahead of launch. “They’re arm twisting the Dutch banks to join ahead of launch. It’s hand-to-hand combat,” one banker said.

Directories businesses are usually highly cash generative so they can handle higher leverage multiples. VNU, however, has declining Ebitda.

“For us, the risk-reward ratio does not make sense on a sub-underwriting basis,” another banker said. “Leverage is too high for what is essentially a turnaround.”

The auction was competitive despite the concerns. Other final round bidders included Carlyle, CVC, Permira and Blackstone.

Equity input is heard at 25%. The deal is the latest in a string of directories buyouts. SEAT’s €3.2bn buyout last year – one of the largest in Europe – was 6.4x leveraged, while Yellow Brick Road’s €765m buyout financing carried total leveraged of 6.61x. Both found support. Elsewhere, bidding for glass manufacturer Gerresheimer Glas has also raised eyebrows on the subject of leverage. Blackstone and Apax Partners are the only two suitors left bidding after the one trade buyer dropped out. Investcorp is selling the company and JP Morgan is providing staple financing.

Market talk is that leverage could be about four times, and although this sounds like a fairly conservative headline figure, it is punchy given that the business generates fairly minimal cashflow.