P4U’s private equity owner, BC Partners, insists that responsibility for its demise lies with mobile network operators Vodafone and EE, which – apparently without warning – dumped their contracts with the firm within a fortnight of each other in September.
The network operators, and the massed ranks of online opinion, are blaming BC for loading P4U up with debt and thus fatally reducing its negotiating flexibility. The fact that the firm took its own skin out of the game last September via a €203m PIK toggle dividend recap deal has attracted considerable ire.
Meanwhile P4U’s founder, John Caudwell, who sold the firm in 2006 for £1.5bn to private equity firm Providence Equity Partners, is lavishing blame on everyone except himself.
One group that has yet to receive much opprobrium, however, is the fund managers who bought the infamous PIK toggle and have seen their investment wiped out in very short order. If anything, they are being seen as objects of compassion, one more group in a long line of victims of ruthless private equity practitioners.
Yet, while in hindsight BC’s decision to take its cash out of P4U ahead of critical negotiations with its network partners looks questionable, it should be remembered that the firm was only able to do so thanks to the connivance of bond investors.
Precisely why fund managers piled into the dividend recap deal is a matter of speculation. A desperate need for yield was clearly a major driver but it seems likely that scanty credit work, and in particular a narrow focus on leverage and financial metrics, also played a part.
By high yield standards, P4U’s leverage of 7.5 times after the dividend recap deal was considered manageable, while the firm was clearly very good at its business of selling phones and contracts to customers, as demonstrated by its ability to generate income before Ebitda of £105m last year.
As a result, bond investors appear to have overlooked the most crucial aspect of P4U’s business model – the fact that it was dependent on a small number third-party contracts which were all due to expire at the same time.
Indeed, so blind were bondholders to the risks associated with these contracts that the withdrawal of mobile network operators O2 and 3 last year went almost unnoticed, while even the loss of P4U’s in-store distribution contract with Dixons in May to larger rival Carphone Warehouse – which may well have been a decisive factor in the decisions by Vodafone and EE to abandon the firm – had little effect on the price of its bonds.
According to bankers, the P4U collapse has prompted a scramble by high yield fund managers to take a closer look at the risks associated with some of their more exotic recent purchases, particularly in the retail sector. If so, this is not before time. Investing in high yield bonds is supposed to be credit-intensive work, and that applies to the nuts and bolts of a business, not just its leverage and financials.
P4U will provide those who want to throw dirt at the private equity industry – not to mention Goldman Sachs, which led the PIK toggle bond – with plenty of ammunition. Yet some should sticks to the fund management community.
BC Partners did, at least, look after their investors – which is more than can be said for those who bought P4U’s bonds.