NEW YORK (Reuters) – The financing package offered by Reed Elsevier (REL.L: Quote, Profile, Research, Stock Buzz) in the sale of its trade publication unit might come in smaller than expected, causing bidders to reexamine their offers, a source familiar with the matter said on Monday.
Only a few bidders remain in the third-round auction of Reed Business Information, the source said, as the Anglo-Dutch publisher tries to sell the unit amid a credit crisis that started last year and has worsened over the past few months.
Now, chaos in the credit markets has led one bank in the lending consortium to back off tentatively, leaving a shortfall of up to about $200 million in the staple financing package of $1.26 billion, the source added.
Staple financing, so called because the details are stapled to the back of a deal sheet, is prearranged by a seller and offered to potential bidders. The package used to be a target for bidders to beat, but it is becoming a more common way to get a deal done in difficult debt markets.
Reed, which owns titles such as Variety, Farmers Weekly and New Scientist, had put together a $1.26 billion staple financing package from a consortium of banks, a source had previously told Reuters. It was also offering $330 million from its own balance sheet in vendor financing for the sale of the unit.
But the package could now be smaller than originally promised, and bidders are reexamining offers amid increasing uncertainty.
Reed declined to comment.
Reed’s offer to provide a vendor loan from its own books also reflects a growing trend aimed at reducing the amount of debt a bidder needs and to bring down leverage ratios in asset sales.
The auction is being closely watched because it signals the return of private-equity players after a year-long retreat.
The credit crunch, which hit last summer, made financing of large leveraged buyouts difficult and severely limited the ability of buyout firms to invest money.
Market conditions have worsened lately, with a crisis that has led to shotgun sales of Bear Stearns and Merrill Lynch, the near collapse of American International Group and the bankruptcies of Lehman Brothers and Washington Mutual Inc.
Several bidders had submitted first-round offers for Reed Business Information earlier this month, valuing the unit at between 1 billion pounds and 1.25 billion pounds ($1.9 billion and $2.3 billion), but the number of contenders has whittled since.
Private equity firms Bain Capital and TPG Capital [TPG.UL] have submitted a third round of bids, the source said. Strauss Zelnick, head of private equity group ZelnickMedia, has teamed up with Apollo Management and also continues to be a contender, the source said.
TPG and Apollo declined to comment, while Bain was not immediately reachable.
Private equity firms Candover Investments (CDI.L: Quote, Profile, Research, Stock Buzz), Cinven Ltd [CINV.UL], Apax Partners and Permira [PERM.UL] had opted out after bidding in the first round, the source said.
German publishing house Gruner + Jahr, part of media group Bertelsmann AG (BTGGg.F: Quote, Profile, Research, Stock Buzz), was involved in the second round of bidding, but has pulled out of the auction, a separate source told Reuters.
Private equity firms Advent and Quadrangle were teaming up with publisher McGraw Hill in the second round of bids, but it was unclear if they remained in the third round. That team was only interested in RBI’s aviation and health care titles, a source had previously said.
Providence Equity Partners was also vying for the assets, separate sources have told Reuters.
Both Providence and Quadrangle were not immediately available for comment.
Reed Chief Executive Sir Crispin Davis has said he would prefer to sell RBI as a whole, but is prepared to split it up. Reed is selling the unit to reduce its exposure to cyclical advertising markets.
Reed Business Information’s revenue is derived roughly equally from the United States, United Kingdom and the rest of Europe. Some bidders are not interested in the entire unit, but only in certain titles or regional parts, sources have said.
By Jui Chakravorty Das
(Additional reporting by Georgina Prodhan in London and Megan Davies in New York, editing by Richard Chang)