Canny Scot Knows How to Keep the Hedge Funds Happy

(Bloomberg Gadfly) -- CEOs often choose to secure their legacy with a big deal, hoping to hand over a transformed company before moving onto bigger things. The travails of Allison Kirkby, the Scottish boss of Swedish telecoms group Tele2 AB, show this is not a plan to be considered lightly.

Back in January, Kirkby unveiled the 27 billion Swedish kronor ($3.1 billion) takeover of pay-TV group Com Hem Holding AB along with her intention to leave upon the deal’s completion. The transaction pleased her lead shareholder, tech investment firm Kinnevik AB, which had a chunky stake in Com Hem too. After all, the strategy of combining fixed-line telephony, mobile and television is hardly new in telecoms.

The deal went down like a lead balloon with everyone else. Take out Kinnevik and the two share registers are poles apart. Tele2’s is dominated by regional funds who shunned Com Hem's 2014 IPO – anecdotally, because of their own past experience of the company's poor customer service. They recoiled at Tele2 agreeing to buy Com Hem shares at more than double the IPO price.

Governance concerns aggravated the situation. The respected Kirkby would hand over to Com Hem's Anders Nilsson -- who’s less well-known in the local investor community. Shareholders began fretting that the invisible hand of Kinnevik would push for some kind of tie-up with Danish telco TDC A/S as an encore.

By contrast, Com Hem’s investment base is largely international money and hedge funds. It keeps leverage much higher than Tele2, using debt for ongoing buybacks. For these investors, switching into Tele2 signalled a future defined by a conservative balance sheet and boring dividends.

Tele2 shares dived, while the deal did little more for Com Hem stock than shield it from the first quarter’s equity turbulence.

Fast forward to today. Tele2 shares have jumped 15 percent in the last month to a five-year high. Kirkby has been out and about with Nilsson trying to sell the deal. The specter of a move on TDC has gone away after it agreed to sell itself to an infrastructure consortium. And Tele2 last week committed to a new financial framework that seems to keep both sets of shareholders happy: a higher leverage target, implying cash for buybacks rather than debt reduction, plus a commitment to pay 80 percent of equity free cash flow in dividends.

For Kinnevik, it's a great outcome after a rough start. The combined value of its Tele2 and Com Hem investment is up 11 percent since the deal emerged, against a European market down almost 4 percent.

The lesson here isn’t that day-one reactions to M&A are wrong, rather that investors can be won over. Kirkby deserves credit for turning the situation around so convincingly. But maybe if she had postponed her exit till a decent time after completion, she could have saved herself a lot of aggro.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2018 Bloomberg L.P.

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