TDC deadlock continues

The buyout of Danish telecoms incumbent TDC, the largest ever in Europe, is still in deadlock four months after the Nordic Telephone Company (NTC) announced its initial bid. The sale has been clouded by uncertainty since minority shareholders led by Arbejdsmarkedets Tillægspension (ATP), Denmark’s state pension fund, refused to sell their 11.8% share in the telco to NTC, leaving private equity firms with a majority stake in a quoted company and little sign of any immediate resolution.

According to a source close to the deal, the consortium now has two options: “It can either appeal to the Erhversankenaevnet [the Danish appeals board], or it can attempt to negotiate a behind-the-scenes compromise with the existing shareholders. To date, ATP has shown little appetite to negotiate in public and some of the US firms in the consortium have a track record of not changing their bid price, which may raise problems with US regulators.”

There is a third option, which would see TDC remain as a publicly quoted company, although this would leave the minority shareholders in a powerless position.

The case has also been something of a PR disaster for Danish private equity in general and the bidding consortium in particular, after it attempted to change the articles of association in the company in order to facilitate the squeeze-out. In a somewhat surprising judgement, Denmark’s Commerce and Companies Agency overturned NTC’s attempt to squeeze out TDC’s remaining minority shareholders.

Commentators in the Danish media have pilloried the consortium’s heavy-handed tactics. One Danish mid-market private equity investor summed up the general tone of the reaction.

“Rather than speak with a common voice through a spokesperson with credibility in the market, we have had five separate guys with an average age of 35 who have shown little understanding of the company or the business climate in the country,” said the source. “This has created an image of private equity funds coming from abroad with little humility, which the media has picked up on. The longer this goes on, the more damaging it is to the profile of the asset class in Denmark.”

The TDC saga began at the end of November 2005 when Nordic Telephone Company, a newco established by private equity groups Apax Partners, Blackstone Group, Kohlberg Kravis Roberts, Permira Advisers and Providence Equity Partners announced its decision to make a recommended offer valuing TDC A/S at DKr76bn.

Although the offer was accepted unanimously by TDC’s board, it ran into problems on January 8 when ATP, decided against accepting the US$15.2bn offer.

After undertaking its own valuation of the company, Bjarne Graven Larsen, chief investment officer at ATP, told Thomson Merger News, a sister paper to IFR Buyouts, that the lack of potential reinvestment opportunities in the Danish stock market had been a factor influencing its rejection of the offer. The combined value of TDC and the earlier public-to-private of ISS, amounted to 13% of the entire market capitalisation of the Danish stock exchange.

Larsen said the decision, which had been totally separate from its private equity office (which is based in a separate building to its public markets team) was partly because “it would be better to hold TDC as it offers good, and relatively high returns and at 9% of our Danish portfolio we would never go out and reinvest DKr4bn in the short term even if this part of the portfolio is the right size at the moment.”

The situation was further complicated when it emerged that ATP was an investor on the other side of the fence through its commitment to Providence Equity Partners’ fourth fund.

Despite these complications, the banking market has enthusiastically backed the ultimate success of the offer. Pricing on the €8.5bn LBO loan backing the bid has been reverse-flexed owing to a healthy oversubscription. The PIK tranche has been taken out and the high-yield bridge increased.