Telenet is issuing EUR 350 million in new bonds. The proceeds will mainly be used to pay of EUR 200 million in short-term debt and the remainder can be used for acquisitions or payments to shareholders. The issue is also aimed at raising the leverage to net debt of 3.5 times EBITDA, versus the current 2.8.
The issue calls to mind the new note from Ziggo, which recently got a warm reception from investors. The Dutch cable operator ended up raising EUR 750 million, after initially targeting 500 million. While Ziggo is not yet in the position to use the proceeds for dividends (see our Research Brief 'Ziggo IPO'), this could be something for Telenet, which is majority controlled by Liberty Global. But there are other reasons to raise debt. Interest rates are currently low, and Telenet showed a strong performance in Q3, with sales up 10 percent, an EBITDA margin of 52.3 percent and a 40 percent increase in free cash flow. It's a good moment then to extend the debt maturity profile and lower the average interest rate. In addition to a possible takeover (the cable market is still relatively fragmented in Wallonia) the proceeds may be used for increasing the dividend. For shareholder Liberty Global, this is one way to ensure a return on its investment.
What's the maximum that Telenet could raise given its aim for a net debt to EBITDA ratio of 3.5 at the end of 2011? If we estimate EBITDA growth at 10 percent, a quick calculation shows that net debt can increase by a factor of 1.375. Currently, debt is EUR 2.24 billion, and in this scenario, it could then increase by EUR 840 million. In short, Telenet has sufficient room to generously allocate the note to institutional investors in order to "further optimise the capital structure".
For other equity investors, there's the relevant question of whether the proceeds will be re-invested or taken out of the company through dividend payments. Investing in infrastructure is a priority, followed by acquisitions, and if there's then something left over, the dividend can go up. If only the dividend goes up, there are real risks: a slowdown in growth, increased competition, too little invested in the network. For the moment, Telenet's doing well and there's no problem, but if it's borrowing in order to raise the dividend, shareholders should watch out. Investors taking up the current bond issue will be first in line to feel the pain if it all goes wrong, but equity investors are still in the queue.
