Foreign Affairs

0
Foreign Affairs
Double Play: Michael Leitner

While many investors might remember 2015 as a year of stagnant stocks and falling oil prices, alternative credit manager Tennenbaum Capital Partners will likely have better memories thanks to lucrative exits for a German cable company and Canadian wireless firm.

The Santa Monica-headquartered firm’s latest exit, a mid-December deal to sell Toronto wireless company Wind Mobile Corp., is emblematic of its opportunistic philosophy. Tennenbaum leveraged a unique situation in Canada’s wireless industry to generate a six-fold return on its money in just 14 months.

“Nice deal,” said Greg MacDonald, a telecommunications analyst for Macquarie Capital Markets in Toronto, of the deal for Wind Mobile, which was attractive partly because of special government-subsidized rates in Canada that Wind Mobile could pay for wireless spectrum frequencies. “Savvy investors understand spectrum is the beachfront property. It goes up in value because of usage patterns and carriers have to have it.”

Tennenbaum honed its investment savvy over the course of two decades spent investing in so-called special situations, which account for half its business. The other half involves direct lending to middle-market companies.

Having grown to $6 billion in assets and 82 employees spread among Santa Monica, San Francisco and New York, Tennenbaum now has more bandwidth, said co-founder and Managing Partner Howard Levkowitz.

“We have a broader tool kit than we used to have in that we’ve got more flexibility and we can invest in more, different things,” he added.

Special situations or opportunistic investing seeks to take advantage of certain circumstances that have affected the valuation of an investment.

In Tennenbaum’s case, it invests in companies undergoing operational, financial or industry change. Such businesses might need unique financing that doesn’t fit the traditional private equity or direct lending model. The firm’s investments could involve a rescue loan to a company in difficult circumstances, buying debt at a discount, purchasing equity or something more structured.

“We tend to be focused on the more unique situations where we’re getting into them without a traditional auction and really providing the value through our additional labor,” Levkowitz said.


German cable

That was the case with Tennenbaum’s investment in the German cable company PrimaCom, headquartered in Leipzig. Its original 2008 involvement involved a $45 million loan, according to regulatory filings.

“Our view at the time was that German cable would consolidate, as it had in every other Western marketplace, and that there would be a little bit more GDP parity over time between East and West Germany such that the consumption of broadband and video in the East would look a lot like the West,” said Tennenbaum Managing Partner Michael Leitner.

Then the credit crisis hit. Tennenbaum provided small capital infusions to the company, taking it over with other stakeholders in 2010 and leading PrimaCom through a restructuring the next year.

Tennenbaum sunk more money into the business to shore up its financials and brought in a new management team. Leitner, a former executive at several American cable firms, took a seat on the board and made quarterly trips to Germany. He also helped recruit other board members including former executives of British and Belgian cable companies, respectively, Virgin Media and Telenet.

“The goal and why I would go out so frequently was to begin to restructure the way our business in Germany conducted itself,” Leitner said. “So we would start to make ourselves look a lot more like a Western cable company … for the purpose of us to either go buy other cable companies or to make ourselves at some level more easily integrated into another larger system.”

The long commute paid off.

PrimaCom’s financials improved, said Leitner, which enabled the purchase of two smaller cable companies funded in part by an equity infusion from Tennenbaum.

When PrimaCom sold to Germany’s third-largest cable company, Berlin’s Tele Columbus, for $778 million last summer, Tennenbaum doubled its roughly $67 million investment, according to regulatory filings.

“Michael was a hugely helpful person on the board, especially on the basis of his operational experience,” said former PrimaCom Chairman Wolf Waschkuhn, describing Leitner as a key person in negotiating the exit deal.

Canadian wireless

Tennenbaum’s other big deal last year came about after its executives found an unusual situation in the Canadian wireless market, which the firm had been tracking since about 2010.

At that time, there were only three major players in the highly consolidated industry despite the government’s efforts to encourage new carriers to enter the market by subsidizing the purchase of wireless spectrum.

One firm to take advantage of the subsidies was Wind Mobile, which entered the market in 2009.

Tennenbaum decided to buy debt in the firm in 2012, after which it watched the Toronto company evolve.

Over the next couple of years, several events took place that eventually lead to Wind Mobile being put up for sale.

Its largest investor, Amsterdam telecommunications firm VimpelCom, is majority owned by an investment vehicle controlled by Russian billionaire Mikhail Fridman – the second-richest man in Russia, according to Forbes. VimpelCom had been trying to solidify its control of Wind Mobile, but Canadian officials were hesitant to bless a deal that would effectively cede control of the network’s infrastructure to a Russian entity, reported newspaper Globe and Mail in 2013. Ultimately, VimpelCom abandoned its efforts.

When Tennenbaum’s debt came due in 2014 as tensions between Russia and Ukraine boiled over, Leitner said VimpelCom elected not to put forth capital to pay off Wind Mobile’s debt, putting the loan into default.

That series of events created an expedited sales process for Tennenbaum.

“We were the beneficiaries of a geopolitical mess,” Levkowitz added. “That’s not how we make most of our living. But it does follow the common theme of we are always looking for value creators … disruptive events that make it harder for ordinary sources of financing.”

After Tennenbaum evaluated the situation with financial partners, the firm decided that with new leadership, Wind Mobile could become Canada’s fourth-biggest wireless player given its 600,000 subscribers, network infrastructure, existing spectrum assets and the likelihood of Canada making available more subsidized spectrum frequencies, which Wind Mobile could pursue.

Tennenbaum and a group of investors including Toronto’s West Face Capital Inc., ended up backing Wind Mobile’s founder, Toronto investment firm Globalive Capital Management Corp., in its acquisition of Wind Mobile in September 2014 for about $260 million, according to Globe and Mail.

Tennenbaum did not disclose how much it paid, though Canadian government documents show the firm wound up taking a 30 percent stake.

As it did with PrimaCom, Tennenbaum helped bring in new management and set up a board with industry experience, including former executives from Germany’s Deutsche Telekom and T-Mobile, Leitner said. The firm took a hands-on approach with Wind Mobile in the first year, involving itself in strategy, corporate development and business planning. That included buying even more spectrum and securing about $312 million in financing partly to enhance its network.

In December, the company announced a $1.2 billion sale to Canadian cable company Shaw Communications in Calgary. When the numbers are pegged to Canadian currency, Tennenbaum and its partners scored a six-fold return, according to Bloomberg. The deal is scheduled to close next month.

“It’s what you do with these companies, not just that you’re making a good buy,” Leitner explained of the firm’s ownership philosophy. “It’s what you do to take advantage of the strategic opportunities right at that time.”

No posts to display