Macquarie is making a bold dive into Danish telecoms.
Teaming up with local pension funds to buy TDC for 40.3 billion Danish crowns ($8.5 billion) is a long-term bet on ultrafast broadband, rather than a foray into classic private equity-style cost cutting.
Macquarie’s bid, which had to be raised to 50.25 Danish crowns a share from the 47 crowns originally reported by Danish newspaper Borsen, doesn’t fit the traditional buyout playbook.
Cost-cutting looks hard since TDC has already been through the private-equity machine. Its 2005 acquisition by Apax, Blackstone and Permira was the largest of its time.
Even now, as a publicly listed company, its EBITDA margin, which is above 40 per cent, surpasses that of Sweden’s Telia or Norway’sTelenor. And TDC’s business is now mostly focused in Denmark, reducing the scope for selling off assets.
Macquarie’s plan hinges on investment.
It wants to pump funds into the new broadband networks that are needed for customers’ TV shows and data, particularly in areas that are currently not served.
Financial engineering may also play a role. The network will be separated from the retail business and, as an asset with predictable cashflows, can be financed with higher levels of borrowing than TDC currently uses, which is less than 3 times EBITDA.
It’s a bold move. Macquarie’s aim is to cover the whole of Denmark with a network which can deliver broadband speeds of one gigabyte per second over the next decade. That’s far more ambitious than the Danish government’s plans.
True, there are a couple of risks. Demand to watch TV shows online could plateau, rather than continuing to grow. And TDC does not currently have a dominant position in broadband. But the good news is that its main rivals are local utilities and fragmented. By teaming up with local funds, Macquarie’s vehicle could secure political backing.
It pays to be bold in infrastructure investment. Funds have a record $US150 billion ($190 billion) of capital they need to put to work, according to consultant Preqin. With stiff competition for assets, infrastructure managers have no choice but to roll up their sleeves.