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The right to recap

Eurazeo, Goldman Sachs Capital Partners, Cinven, Texas Pacific and Spectrum Equity are joining the dividend recap trail in a grand way. The quintet all hold a stake in Eutelsat, the European satellite company, and are gearing up for a US$2bn recapitalisation to take out some equity. The deal is still some weeks away, but it looks like potentially all of the proceeds will be ploughed back as a dividend. The new debt is sitting at the holdco too, a fairly new trend in Europe if not in the US.

The move by the shareholders will put BBB+ rated Eutelsat, one of the strongest companies in the satellite sector, back in leveraged territory. Recent gains that earned the company a ratings upgrade in October will be swallowed up as the recapitalisation piles on another four full turns of leverage.

The plan reads like a horror story for existing debt investors, but it is the kind of result that financial sponsors have every right to expect. Eutelsat managed to increase revenues by 6.3% to €670m and grew Ebitda by 10.8% in its last financial year. It would not have got anywhere without the backing from the private equity firms in the first place, however.

On top of that, the sponsors’ value creation experience and expertise was sure to have been pivotal to the process. Arguably, Eutelsat might have fallen far short of these impressive levels without input from Eurazeo and the rest of its private equity backers. It was battling increasing competition and a downturn in demand, the kind of scenario where private equity firms excel.

For the manage-ment of Eutelsat, and indeed other companies that have or will be the subject of dividend recaps, the extra leverage is harder to swallow in the near-term. It is not unreasonable for management teams to want to plough back the fruits of their efforts into operations. However, any executives that are frustrated because their gains have gone to private equity instead would do well to look at Travelex.

3i will recuperate a 10x return on its investment at exit from the foreign exchange specialist in a deal agreed with Apax. The result is a testimony to its judgment because, at the time of the investment in 1998, few other firms were willing to take a bet on foreign exchange. CEO and founder Lloyd Dorfman has fared just as well, if not better. The man who built up the business from a single outlet back in the 1970s stands to reap around £300m from the sale. And he still retains a 30% stake. Doesn’t a result like that prove the worth of private equity in the longer-term? Nobody ever claimed it was a short-term game.