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(Ware)House of Morgan

9 December 2011 By Quentin Webb

JPMorgan may soon rank among Germany’s top cable-TV broadcasters. The U.S. investment bank committed to be a back-up buyer if regulators stop Liberty Global acquiring number three cable firm, Kabel Baden-Wuerttemberg. But if JPMorgan finds itself on the hook, that won’t automatically be the death knell for these unusual agreements.

The firm made the commitment in March before the euro zone crisis intensified. Its position now appears awkward. The Federal Cartel Office must decide by Dec. 15 whether Liberty, run by media tycoon John Malone, can combine KabelBW with the number two in German cable, Unitymedia. The watchdog worries the deal could disadvantage television stations, which pay to transmit programmes, and housing associations, which buy cable for whole apartment blocks.

Liberty has offered some remedies. But if these don’t suffice, JPMorgan has to shell out 910 million euros to buy KabelBW from EQT, the Swedish buyout firm it advised originally. Then it would have to re-auction the company. Taking on illiquid, leveraged buyout equity is the last thing a bank should want to do right now. But it’s not hard to see why JPMorgan agreed to help its client in this way. Its balance sheet wasn’t shot to pieces in the crisis, and it has obtained some safeguards. Liberty would help fund the purchase and has indemnified JPM against loss on any re-sale. What’s more, JPMorgan wouldn’t actually own KabelBW until early 2012 and would then class it as an asset held for sale. Effectively, JPM’s role is purely as a legal owner.

Moreover, a new KabelBW auction shouldn’t be hard. Private equity loves cable’s cashflows, and KabelBW is on a tear: EBITDA leapt 15 percent in the year to end-September. Former suitors like CVC would probably re-bid. A buyer could keep in place KabelBW’s capital structure, with its keenly priced junk bonds issued in March – financing impossible to obtain in today’s crisis-ravaged markets.

Liberty has done similar things before, getting banks to “warehouse” a Czech M&A target before regulatory approval. Such devices resolve a common M&A dilemma: the best fit between buyer and seller can lead to both the highest offer price, and the biggest risk regulators say no. Assuming JPM escapes a prolonged tangle, the “backstop” may not stop here.


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