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July 2, 2008

Memo to private equity: Why not try a proper challenge?

By Peter Kirwan MM blog

So a consortium of private equity firms has got round to bidding for Informa.

This, however, feels like one of those deals that — like climbing Mt. Everest — lacks a rationale apart from the fact that it’s capable of being done.

Currently, Informa carries around £1.25bn of debt. At 4.4 times EBITDA (roughly equivalent to operating profits), that already looked high. Indeed, reducing debts was supposedly one of the attractions of talking with United Business Media.

So what will private equity bidders do? Yep: they’re going to increase, rather than reduce, Informa’s debts.

Specifically, according to the FT, they are proposing to ratchet up the company’s loans from £1.25bn to £1.85bn.

This will help to pay for the deal (in the same way it helped the Glazer family buy Manchester United). But it would also mean that Informa’s net debts would amount to more than six times EBITDA.

And take a look at the interest rates that a newly-private Informa would have to pay on its shiny new loans, as reported by the FT:

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  • £1.39bn at 3.75% over Libor: in other words, around . . . 9.7% *
  • £463n in high-yield (a.k.a. junk) debt costing. . . 11.75%

Under these circumstances, after a successful private equity deal, Informa would find itself making interest payments of £188m a year.

In a recent conference call with analysts, Informa suggested that it expected to pay a “blended” interest rate of 6.25% on its debt during 2008.

Of course, this will have increased since then, but it’s worth noting that under such circumstances, Informa would find itself making interest payments of around £78m this year.

What’s £110m between friends?

Actually, quite a lot — even if Informa’s new owners don’t demand much in terms of dividends from their investment in the short term.

If this deal goes through, employees can expect the mother of all cost-cutting programme to swing into action from Day One.

Unless Informa’s board has been deceiving investors about the company’s prospects, this acquisition would take a moderately stressed, but fundamentally solid, company and put it through the wringer without much justification.

By contrast, if private equity were really doing its job, it would be tackling a proper challenge — like restructuring the regional press.

The only silver lining is the market’s suspicion that Informa’s private equity suitors won’t be able to raise the money required for a bid. This is evident in a share price that’s stolidly refusing to perk up to anything like the anticipated offer of 506p.

* I’m using three-month LIBOR (5.95%) here: it seems to be the benchmark.

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