Kabel Deutschland IPO – ambitious play or cunning ploy?

(Reuters) – Kabel Deutschland’s premium pricing for its $1 billion IPO could invite a similar fate to other recent failed private equity-led offerings, and some still think it’s a ploy to smoke out trade buyers.

On Wednesday, the price range emerged on the offering, valuing KDG at an enterprise value of 6.75-7.25 times earnings before interest, tax, depreciation and amortization (EV/EBITDA), about a 10 percent premium to European cable peers.

Asking equity investors to pay a premium when they typically expect a 10-15 percent IPO discount is ambitious.

“They need the market to be very robust for next week,” said a London-based fund manager who is considering the offering.

KDG’s offering is being closely watched by other IPO candidates including German chemical distributor Brenntag, Spanish travel reservations firm Amadeus and Nordic teleco TDC.


Private equity-backed Travelport, which attempted to sell shares at a valuation on a par with peers, was forced to scrap its $1.8 billion London listing last month as the deal failed to secure support from big institutional accounts.

An EV/EBITDA multiple of 6.5 would look more attractive, said fund managers, in line with Belgian cable operator Telenet TENT.BR, which trades at 6.8 times EV/EBITDA and Britain’s Virgin Media (VMED.L)(VMED.O) at a multiple of 6 times.

“Telenet is of slightly lower grade than KDG, but they have executed their strategy excellently; why should we pay more for KDG?” said another fund manager who attended KDG’s roadshow in London.

But some investors are attracted by KDG’s potential double digit growth. Fund houses that focus on telecom and cable businesses are also finding it an interesting potential buy.

“If you buy it, you buy it because you believe KDG will have massive top-line growth and within three to four years it will pay down debts. It’s a deleveraging story,” said the first fund manager.

KDG’s revenue grew 14 percent in the year ended March 2009 and 9 percent in the nine months ended December 2009, but high interest expenses swallowed up all its operating profit, taking accumulated net losses to $1.7 billion euros at the end of 2009.

“This negative equity is a concern for us,” said a value-focused fund manger.


Another problem is that some doubt the real intentions of KDG’s owner, U.S. private equity firm Providence Equity Partners.

In February Providence said it was abandoning a trade sale to other private equity groups for a flotation instead.

The so-called dual-track process had attracted trade offers in the region of 5-5.5 billion euros ($6.8 billion), within the range of the IPO’s stated valuation, but Providence wanted to share any future upside in KDG.

It makes sense for Providence, which has invested about 1 billion euros in KDG in the past seven years, to want to retain a majority stake in KDG if it agrees with analysts that the business will become profitable by March 2012.

But some still wonder if the IPO is a smokescreen.

“They are serious up to a point. They are trying to create tension up to the last minute,” said a source familiar with the matter, but not working on the IPO.

“One suspects that by doing a roadshow, going around talking to investors we establish some kind of price point and then it gets sold to private equity, and that’s frustrating,” said a head of European equities at a large fund house.