Junk Bond Woes Snag Kabel Deutschland Sale

FRANKFURT (Reuters) – The sale of cable television operator Kabel Deutschland is hitting snags as the high-yield bond market dries up, jeopardising what would be Europe’s biggest leveraged buyout in two years, sources said.

Junk bonds would play a crucial role in what would be a multi-billion-dollar deal, so the sharp increase in financing costs for them poses a major obstacle, several people close to the matter told Reuters on Friday.

“The market for these relatively risky instruments is practically dead,” one banker close to the situation said.

Another said: “It would not be surprising if the sale process is postponed.”

Half a dozen private equity houses have offered 5-5.5 billion euros ($6.8-7.5 billion) for the German TV operator, which is 88 percent owned by private equity firm Providence Equity Partners, 8 percent by Teachers’ Pension Plan and 4 percent by management.

A successful deal would mark the biggest acquisition by private equity since the financial crisis hit, so it is being seen as a test case for whether credit markets are willing to finance such large transactions.

A banking consortium is standing by to provide a bridge loan of up to 4 billion euros that is supposed to be refinanced with bonds, but the plan is looking shaky amid increasingly risk-averse markets.

Automotive supplier Continental AG (CONG.DE), for instance, had to postpone plans for a junk bond issue this year amid weak demand, financial sources have said.

“There is a big question mark over what happens after the bridge loan,” one banker said.

Aside from the tough financial markets, bankers agree that Kabel Deutschland remains an attractive acquisition target given the steady cash flow it generates from nine million households in 13 German states.

That means Providence can afford to wait until market conditions improve, several sources said.

Providence is also still considering a flotation for the business, a source close to the deal said, but weakness on stock markets of late would make an IPO more difficult.

Providence and Kabel Deutschland declined comment.

Among bidders in the race, BC Partners and CVC have formed an alliance. Rivals include Apax, Advent, Carlyle and Bain Capital, the sources said.

By Philipp Halstrick and Alexander Huebne
(Additional reporting by Victoria Howley, Tessa Walsh and Megan Davies; Writing by Michael Shields; editing by John Stonestreet)