O'Brien bids for INM: Backdoor takeover aims to please banks and bondholders

At Independent News & Media, the endgame has kicked off. Denis O’Brien has unleashed his bid to take control of the company.

O’Brien wants to cut the O’Reillys out of any refinancing. His backdoor takeover effort may succeed if it offers more to INM’s banks and bondholders than the O’Reillys can muster.

The major concern for most readers is probably the future of the Independent and Independent On Sunday.

A new owner (surely likely if O’Brien wins) probably wouldn’t be a disaster. The papers might end up leading a more constrained existence inside INM if the O’Reillys emerge victorious. Why? Because regardless of who wins, the banks will ultimately refinance INM’s debts on swingeing terms.

From this perspective, the loyalty of some commentators to the O’Reillys seems misplaced. For journalists working on the Independent and Independent On Sunday, the O’Brien proposal might just prove to be more attractive (if also more risky).

In any event, O’Brien faces some big hurdles, including the bondholders, who, like Dr. Strangelove, possess the nuclear option of shoving INM into bankruptcy.

The bondholders are less than charmed by O’Brien. One of their advisors tells the FT they will ‘consider anything’— including his de facto takeover bid. But if O’Brien wins, the bondholders will need to live alongside him on the share register, which makes the advisor’s next comment pertinent:

“We are also not convinced Mr O’Brien would offer the right management for the business and believe the company would benefit from the diversification of its shareholder base offered under the company’s proposal.”

Against this, it’s necessary to weigh the fact that O’Brien is offering the bondholders something that the O’Reillys aren’t offering: cash.

In any event, the banks are real kingmakers around here: they’re owed more than anyone else (€1.1bn). The banks will make their decision by looking at two things.

First, they will try to establish who has the better chance of wringing the most profit from INM. Here O’Brien has the advantage of wanting to sell unprofitable assets (like the Independent) while retaining profitable ones (the South African advertising business).

At the very least, the O’Reilly clan has the advantage of being familiar with the business.

Second, the banks will push both sides to maximise interest charges and the size of repayments. Almost certainly, the winner will promise the banks more cash, and sooner.

Details of the rival O’Reilly and O’Brien plans remain sketchy. Here’s what’s been reported so far:

The O’Reilly Proposal

– All shareholders equally diluted by 45% shareholding offered to bondholders.

– In return, bondholders write off €100m-€120m of €200m debt. . .

– . . . and ‘extend the payback time’on the rest. [Reuters]

– INM will then raise €90m with a rights issue. Presumably, the proceeds have been earmarked to repay loans to banks (not bondholders).

– All shareholders will get an opportunity to ‘rebuild their position in a rights issue'[Irish Times/FT]

– In total, debts to be reduced by €350m (via rights issue, bondholder shares and asset sales already announced) [The Times]

– Deal can be done without O’Brien’s agreement.

– The bondholders’ 45% stake would require a waiver from the Irish financial authorities.

– Sell the profitable South African outdoor business.

– Retain the Indy and Sindy.

The O’Brien Proposal

– O’Brien will take a majority stake after injecting €100m cash into INM via his ‘RescueCo'(INM is currently valued at €240m). [The Times]

– An unknown portion of O’Brien’s cash used as part-payment to bondholders owed €200m [The Times]

– Bondholders receive a smaller stake in INM than under the O’Reilly proposal. But they will hold shares in what O’Brien describes as a better capitalised company [Irish Times]

– O’Brien will rely upon ‘a mechanism that did not give other investors [including the O’Reillys] the same right to subscribe to new shares”. [The Times]

– INM suggests O’Brien plan would require company to enter bankruptcy first. O’Brien camp denies this. [The Times]

– O’Brien would take ‘majority stake. . . and be empowered to depose its management”. [Irish Times/FT]

– O’Brien’s 30%+ shareholding would require a waiver from the Irish financial authorities.

– Retain INM’s profitable South African outdoor business.

– Sell or shut the Indy and Sindy.

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