(Bloomberg Opinion) -- One of Europe’s most ambitious deals in recent years is in jeopardy. The Zurich-based telecoms operator Sunrise Communications Group AG is straining every sinew to keep its 6.3 billion Swiss francs ($6.3 billion) bid for U.S. billionaire John Malone’s UPC Switzerland alive amid stubborn opposition from its own top shareholder. This is becoming a make-or-break situation for Sunrise’s management.
The logic of the jumbo deal is to created a “converged” company with services spanning conventional and mobile telephony, cable television and broadband. But Sunrise cannot do it without raising funds from its shareholders via a rights offer. That requires a majority vote, which puts investors in control.
The cash call was meant to be 4.1 billion francs, more than Sunrise’s market capitalization. Freenet AG, the German telco with a 25% stake in Sunrise, said it wouldn’t back such a large fund-raising (in part, because it couldn’t afford to subscribe for its 1 billion francs portion of the share sale). Its opposition has forced Sunrise to rethink the size of the rights offer.
Monday brought new terms for financing the UPC deal. Debt will replace 1.3 billion francs of the initial equity component. In spite of the increased leverage, the deal’s overall financing costs have fallen because Sunrise is expanding an existing cheap borrowing facility. What’s more, a reduction in the number of new shares issued will make the cash flow generated from the combination look better on a per-share basis. And Sunrise says its dividend payout will rise proportionately with the value of the enlarged company.
How has it achieved the seemingly impossible by reworking this transaction? Sunrise’s answer is that the merged company will be able to sustain more debt than first envisaged because UPC’s performance has improved, and there are more expected savings from the deal.
But Sunrise shareholders should be under no illusions. This deal now carries substantially more financial risk. The combined net debt of the two companies is equivalent to a lofty 4.2 times their trailing Ebitda on June 30. Sunrise says this should fall below 3 times in the medium term as savings flow through. Still, there's no margin for error.
No one will ever believe you’re a winner when you agree a transaction with an experienced cable industry deal-maker like Malone. A simultaneous cut in the deal price might therefore have helped win over the naysayers. Sunrise values UPC at 5.1 billion francs on a standalone basis, and puts the value creation from the deal at 3.1 billion francs. That does indeed look optimistic. But Malone was never going to agree to a price cut.
The situation is now equally about the future of Sunrise’s chief executive officer Olaf Swantee. He has doggedly pursued his convergence strategy. Even though Freenet has a big stake, it cannot kill the takeover on its own. The German refusenik has some backing. But support from two-thirds of the rest of the shareholder register would still let Swantee get his deal.
If he can’t persuade them of his vision, it’s questionable why shareholders would want him as CEO and why he’d want to stay.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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