German media conglomerate Bertelsmann will buy out the 25-percent stake held by Belgium's richest man, Albert Frere, for 4.5 billion euros ($5.8 billion) and thereby avoid a public listing of the family company.
Bertelsmann, publisher of The Da Vinci Code and producer of Pop Idol, said on Thursday it would buy the stake from Groupe Bruxelles Lambert (GBL), the investment vehicle of Frere, who had intended to float the shares.
The price of Bertelsmann's debt wobbled, while GBL shares hit a one-week high, outpacing the broader European market.
The Mohn family that controls Bertelsmann had opposed Frere's plan for an initial public offering (IPO) to avoid potential shareholder pressure to pursue short-term objectives.
An offering of 25 percent of Bertelsmann's shares would have been one of Germany's biggest IPOs in recent years.
This was the right move at the right time. The price is just right, Bertelsmann's Chief Executive Gunter Thielen told a conference call, adding that the price Bertelsmann would pay included GBL's slice of the dividend for 2005.
Bertelsmann said the buyback would be effective on July 1, and financed with a bridge loan provided by several banks.
A significant part of the loan will be repaid over the next 12 to 18 months by retained cash flows from operations as well as by expected proceeds from the divestiture of BMG Music Publishing, it said.
An auction among selected bidders would start in June.
Chief Financial Officer Thomas Rabe told the conference call that Bertelsmann's April-May earnings were still enjoying the trend that delivered a record first-quarter profit.
Thielen forecast over 5 percent full-year 2006 sales growth.
Analysts had valued Frere's stake -- obtained in 2001 with the right to demand an IPO in a swap for a 29.9 percent stake in pan-European broadcaster RTL -- at about 4 billion euros, based on a comparison with other media conglomerates.
We chose the best route for the group. We understood exactly the position of the Mohn family. They wanted Bertelsmann to remain a private company, said a GBL official who asked not to be named. If we could get a fair price it was better.
On Monday, Bertelsmann said it was prepared for a buyback at a reasonable price, prompting credit rating agencies to say they would review their ratings.
Standard & Poor's and Fitch put their BBB-plus credit ratings on Bertelsmann on review for a downgrade. S&P also said it might cut the credit rating on RTL. Moody's cut the outlook on its equivalent Baa1 rating to negative.
Investment bank DrKW said on Thursday it expected Bertelsmann's ratings to be lowered by one notch.
The price tag is toward the high end of market expectations, it said in a note, estimating that Bertelsmann's debt load would increase to 3.1 times operating earnings before interest, taxes, depreciation and amortization (EBITDA).
Bertelsmann executives have said they want to limit borrowing to no more than 2.3 times EBITDA. At end-2005, the company's debt corresponded to 2.2 times EBITDA.
Rabe said the GBL buyout would raise temporarily the debtload to 3.4 times EBITDA.
BACK ON TARGET
By the end of 2006 it will be just below 3 and by the end of 2007 it should be back at the target of 2.3, he said.
The financing of the transaction will ... enable Bertelsmann to continue to invest in growth and to maintain its solid financial standing, the company said.
DrKW said it expected Bertelsmann to refinance part of the deal in the bond market in the second half of 2006.
The yield spread between Bertelsmann's 4.625-percent coupon 2010 bond and 4-year euro zone state debt shrank 2 basis points to 65 bps by 1045 GMT, and its credit default swaps (CDS) traded 5 bps tighter than Wednesday's 50 bps high.
The tightening is not because of the buyout agreement. We have expected the agreement. The tightening came at the end of day yesterday, because the CDS was bouncing back from the widening on rating agency comments, said a trader in London.
GBL shares were 1.7 percent higher at 84.55 euros at 1035 GMT, with the FTSEurofirst300 index up 0.1 percent.
Now we are cash-rich, so we have time to think what we will do, the GBL official said.
Earlier this week GBL raised its stake in French building materials group Lafarge to 10 percent. It also has a 26.4 percent stake in Imerys.
(Additional reporting by Phil Blenkinsop in Brussels and Bei-Bei She in London)