Welsh Carson Buys Centennial Without a Net –

To clinch a buyout that was close to falling apart in November, Welsh, Carson, Anderson & Stowe and The Blackstone Group agreed to waive a material adverse conditions (MAC) clause on its $1.8 billion agreement to purchase Centennial Cellular Corp., according to people familiar with the transaction.

The firms originally had agreed to buy Centennial in July for $1.9 billion prior to the debt markets’ crash that resulted in the deal’s re-jiggering. The buyout finally closed in early January.

In the final agreement, Centennial lowered its purchase price by $100 million, and Blackstone and Welsh Carson agreed together to commit an additional $50 million in equity, said Thomas McInerney, a partner at Welsh Carson.

Welsh Carson ultimately invested $255 million in equity-$210 million from WCAS VIII and $28.5 million from WCAS VII-balanced out with a commitment from its mezzanine fund and management. Blackstone invested $137.6 million in equity.

Merrill Lynch & Co. syndicated $1.05 billion of senior loans at 300 basis points above LIBOR to a group led by Chase Manhattan Bank, Scotia Bank and Bank of America; it syndicated $370 million in high-yield notes at a rate of 10.75% to a group led by the same consortium, Mr. McInerney said.

Centennial was willing to renegotiate the price only if Merrill Lynch and the sponsors agreed to remove the MAC clause on the deal’s bridge financing. It is the first time that an underwriter has agreed to syndicate a loan without MAC protection, said Chris Birosak, head of loan origination at Merrill Lynch. Welsh Carson and Blackstone also agreed to the unusual terms.

“After we renegotiated the deal, Merrill Lynch pulled the MAC clause; the seller wanted it removed, and we wanted the certainty of making the deal,” Mr. McInerney said.

The agreement was reached at the end of November and, if market conditions changed in December, Merrill faced the risk of owning much of the senior debt and bonds in the $1.425 billion offering. At the same time, the sponsors also were taking the chance of overpaying for the company.

If the deal had fallen apart in November, Mr. Birosak said it is unclear if Welsh Carson and Blackstone would have found another way to buy the company. He added that the firms wanted to go forward but were not desperate to make the deal.

Throwing the Bridge Loan Dice

From his perspective, Mr. Birosak considered removing the MAC clause a calculated gamble for Merrill Lynch.

The firm had been working on underwriting the investment for four months and also underwrote Spectrum Equity Investors’ buyout of Price Cellular (now American Cellular) in the summer and, therefore, was familiar with which investors would be interested in financing the transaction as well as the overall health of Centennial.

An intermediary not involved directly with the deal speculated that Merrill was trying to please two large sponsors in Welsh Carson and Blackstone and to show its loyalty to the buyout groups.

For working nine months on the deal, Centennial paid Welsh Carson a $10.7 million consummation fee, while Blackstone received $3.3 million, according to public records.