The days of competitive auctions are long gone, and Jefferies needed in-depth company knowledge and the ability to arrange a financing package to help bring CVC Capital Partners and online payments firm Skrill together.
These are testing times for merger and acquisition (M&A) advisers, who need rather more skill and persistence to generate decent fees than they did when business was booming. Going by recent results, one of the more persistent and skilful groups has been the Jefferies telecoms, media and technology (TMT) team.
Even as economic recovery seemed more plausible, corporate caution in 2013 produced the slowest first half for global M&A since 2009, according to Thomson Reuters. Mergermarket figures show that the TMT sector enjoyed an unusually large share – 21.7% in the year to July 29, against a comparable 13% in 2012. But that was based on the lowest number of transactions in the sector for three years, inflated by three mega-deals – Liberty Global’s purchase of Virgin Media, the Dell buyout and the Publicis/Omnicom merger.
They are the exceptions that are proving the rule right now. Part of the M&A malaise is that there are just not many big deals around, and getting mandates for the smaller ones can require a certain nimbleness of foot. With 3800 employees around the world, Jefferies is not exactly a boutique, but it is more sharply focused on investment banking than any of its major competitors. Nearly two-fifths of its revenues came from investment banking in the past 12 months, which is more than double the share for its nearest major rival, Goldman Sachs (16%).
Part of the rest comes from trading equity and debt, and asset management. Jefferies is also a lender, via its own balance sheet as well as a 50/50 joint venture with Massachusetts Mutual Life Insurance Company. The lending is mostly short-term finance to facilitate capital market transactions for its clients – the firm is proud of its reputation for single-mindedly serving its clients’ interests.
Having grown by acquiring various investment banking boutiques before the crisis, Jefferies has beefed up its expertise in certain sectors since then by hiring from other firms. In 2009 it famously took on the UBS healthcare team, led by Benjamin Lorello, who then became head of investment banking. The following year Dominic Lester, Jefferies’ European joint head of investment banking and European head of TMT, also came over from UBS, where he had been global head of communications technology. Today there are 17 bankers in the European TMT team out of the firm’s total of 100 TMT bankers.
Mid-market focus
This makes up one of the biggest such teams in the world and one of the firm’s key sectoral revenue generators, alongside healthcare and oil and gas. While technology has a lower-case ‘T’ in many banks, Jefferies reckons it brings a lot of value to its technology clients. “Most of the activity in technology is in the mid-market,” says Mr Lester. “To be effective you need a big team or you miss a lot of transactions.” The firm has focused on a number of subsectors including the internet and semiconductors, where the relationships it has developed have brought some notable successes.
Unlike some others, Jefferies deploys product experts in disciplines such as M&A and leveraged finance, alongside its industry bankers. One recent deal that showcased Jefferies’ skills was the acquisition of a majority stake in online payment specialists Skrill by CVC Capital Partners. Jefferies was sole financial adviser to the acquirer.
It comes as no surprise that the firm devotes a lot of attention to financial sponsors, for whom the market has been coming back to life. “Financial markets are very strong, so sponsors can put leverage on a business and be aggressive on price,” says Tom Muoio, European head of leveraged finance capital markets. “This was a small deal for CVC, but big funds that have raised a lot of capital are having to look at smaller deals.”
Skrill, which used to trade as Moneybookers, operates one of Europe’s largest online payment systems, serving 35 million account holders and 150,000 merchants. It employs some 700 people, with annual revenues of €200m and €50m of earnings before interest, taxes, depreciation and amortisation (Ebitda) in 2012, and its particular speciality is online gambling. It had been owned for the past six years by Bahrain-based Investcorp, which now wanted to take some money off the table.
Investcorp had plans to float Skrill in 2010 and again in 2011, but the first attempt came to naught and the second had to be pulled at the last minute when the market shut down. Jefferies was an adviser to the scrapped initial public offering, so was well acquainted with the company. “In fact, we knew the business so well that we could educate our client about it without doing due diligence,” says Mr Lester.
One relationship went back even further. Skrill CEO Siegfried Heimgaertner used to be CEO of German payments provider Easycash, which was represented by Mr Lester during his UBS days. The people aspects of M&A transactions can be as important as the financial details, according to Tariq Hussain, Jefferies’ European co-head of M&A, and that was true in this case. “It was a question of which buyer would have the best chemistry with the management team, and would be most aligned with its business plan,” says Mr Hussain.
The whole package
If management wanted a sympathetic investor and minimal disruption, Investcorp wanted a good price, the certainty of a transaction and a reputable buyer. “The gambling industry has a lot of regulatory unknowns, with different regimes in different countries,” says Mr Lester. “So while a lot of sponsors were initially interested, when they looked more closely at the detail they were discouraged.”
CVC was comfortable with the gambling sector, though it needed to come up to speed on the technology aspects of the business. What appealed were Skrill’s strong cash generation and its prospects for expansion in new growth areas. The possibility of eventual liberalisation of the US online gaming market was also attractive. What CVC did not want was an auction which could force it to overpay.
To help pre-empt such a possibility, Mr Muoio’s team put together a package providing CVC with fully committed debt financing. “We don’t have the biggest balance sheet, but we do like to provide debt finance to companies for which there is no comparable,” says Mr Lester.
Jefferies took the idea to CVC before it was even aware that the opportunity existed. The fact that Jefferies was prepared to commit finance before formal due diligence gave it additional comfort, and allowed it to move quickly and with confidence. “The biggest weapon in our armoury is that we were there first,” says Mr Hussain. “And if you’re there first, 80% of the time you end up winning.”
So it proved. Even as the market wobbled in July and August, the availability of funding for a quick transaction was persuasive. CVC and Skrill management liked each other, which was important to Investcorp, since it would remain a minority shareholder. The deal was done. CVC acquired an undisclosed majority stake (75%, according to Reuters), financed by equity and €305m in debt, giving Skrill an enterprise value of €600m, or 12 times 2012 Ebitda.
Track record
Elsewhere, industry knowledge and the ability to provide finance earned Jefferies a place as one of four lead arrangers the $1.795bn credit facility used to finance the buyout of Misys by Vista Equity Partners. The firm was sole financial adviser to TPG Capital in its successful pre-emptive bid for TSL Education Group, publishers of the Times Literary Supplement. The seller was Charterhouse, at an enterprise value of £400m ($641.61m). Jefferies also advised BC Partners on its acquisition of Springer Science Business+Media from Swedish investment fund EQT and Government of Singapore Investment Corporation for €3.3bn. More recently still, it was sole financial adviser to digital communications agency LBi International on its €437m recommended offer from Publicis.
“The level of risk aversion continues to be extremely high,” says Mr Lester. “There are very few hot auctions that go through to the finish. The days when you sent out 100 books and everyone went crazy are over. Today there is often only one party, and you have to identify it and think creatively if you want to get deals done.”
