Lining up for Kabel

Private equity: Private equity is springing back to life. Banks appear to be lining up to back the biggest European buyout in two years — a 5 billion euro ($7.4 billion) bid for Kabel Deutschland, the German operator currently owned by Providence Equity Partners.

Kabel offers the so-called triple-play: cable television, broadband internet and old-fashioned telephones. Germany is still a growth market. Only 58 per cent of the country has broadband, almost 10 per cent lower penetration than in the UK. As yet, Kabel’s average subscriber takes only 1.27 services, leaving plenty of room for additional sales. Still the company’s Ebitda margin has been above 40 per cent.

German peer Unitymedia was recently sold to US cable operator Liberty Global at around 7.5 times forward Ebitda. By that measure, Kabel Deutschland’s enterprise value would be 4.8 billion euros. Subtract the 2.4 billion euros of debt on the 2008 balance sheet and Kabel would have an equity value of roughly 2.5 billion euros.

That’s what an initial public offering (IPO) could be expected to raise. Kabel’s owners have been preparing for one, but if other buyout groups can now secure bank financing, the prospect of an immediate cash exit without an IPO discount will be tempting.

A private equity sale has just come out on top for Pets at Home, ending a “dual-track” process which was preparing simultaneously for private sale and IPO. Bridgepoint, its private equity owner, has agreed to sell the luxury animal goods merchandiser to rival Kohlberg Kravis Roberts.

The preference for the buyout track in part reflects bankers' increased confidence. In Kabel's case, the lenders backing rumoured private equity bidders CVC Capital Partners and Carlyle may be able to arrange a pre-syndicated bond issue. Kabel already has 30 per cent of its total debt in bonds. After strong recent demand for bonds issued by other cable operators, notably Virgin Media , the banks won't worry too much about being stuck with their bridge loans.

One good deal may encourage others. If Kabel gets shifted into new private equity hands, a wider revival of the buyout trade might not be far behind.