Hedge funds and Private Equity - PES

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TDC case, Denmark
TDC was taken over by a group of five foreign private equity firm specialists – Apax Partners;
Blackstone Group; Kohlberg Kravis Roberts; Permira; and Providence Equity – in the
largest takeover in Europe to date. For about 10.5bn, they purchased 88.2% of TDC shares
It was financed by slightly more than 80% debt. Capital management fees are not specified,
but experience suggest they will be in the tens of million of euros. The 2005 Annual Report
notes significant TDC credit rating downgradings by the Standard and Poor and Moody
Investor services as a result of the leverage buyout. The acquisition increases TDC’s net
debt to total assets ration from 18% to about 90% at interest rates substantially higher than
those for the previously established debt. TDC’s debt ratio is now 97% of capitalization. The
new owners have been deliberately vague about why they have taken over TDC and what
their plans are, stating only that they expect to own TDC for about five years. The evidence
to date suggests that the TDC takeover has nothing to do with improving the efficiency of
TDC. The new owners have no expertise in telecom and are relying virtually entirely on the
previous management. The diversified stockholders were long term investors that left the
management of the company to the managers. The immediate cash payout of almost half
TDC’s assets suggests a pretty clear case of asset stripping, and the offering of shares in
NTCI to 41 senior executives of TDC provides a major benefit to TDC management for
continuing efforts leading to further cash payouts. This is short-term disinvestment, not longterm
investment. Observers can be thankful that the only reason all these details about the
takeover activities are known is because the new owners were unsuccessful in their attempt
to de-list TDC from the transparency requirements for public stock trading.
3.2 After an acquisition – conflict of interests
The effects of Private Equity Fund buyouts and restructuring on infrastructure operators are
magnified because of the unique characteristics of infrastructure operators noted above. The
most significant impact is on the capability to efficiently finance long-term investment
programmes. This is where the short-term priorities of Private Equity Funds and the long-term
priorities of infrastructure operators are in direct conflict. After the acquisition, the new owners
have a powerful incentive to pay themselves the major portion of the large internally generated
cash flow that would have been used for reinvestment. In addition, the infrastructure operators
acquire the large debt borrowed by the PEF to acquire the operator. This dramatically increases
the firm’s debt-equity ratio and its annual interest obligations. It suffers a major decline in its
credit ratings and the interest rates it must pay on its debt. Internally generated capital for reinvestment
is dramatically reduced, as is the firm’s capability to borrow investment funds, even
at higher interest costs. This means significant reductions in their investment programmess
and/or increases in prices for consumers of their monopoly services.
Other areas where this conflict between the short-term priorities of the Private Equity Funds and
the long term development focus of the infrastructure operators include:
research and development, a long term priority where infrastructure operators traditionally
have maintained activities, and Private Equity Funds typically have had no interest;
quality of service where infrastructure operators traditionally have targeted a higher quality
than Private Equity Funds are likely to find necessary to maximise short-term profits;