Tue 11/15/2022 06:44 AM
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Relevant Documents:
Listing Particulars for €5B Debt Issuance Program
Pricing Supplement €750M 0.000% Notes due 2025
Pricing Supplement €750M 0.375% Notes due 2027
Pricing Supplement €700M 0.750% Notes due 2030
Vantage Towers Press Release
Vodafone Press Release
Vodafone Transaction Presentation

Vodafone recently announced that it is entering into a joint venture with KKR and Global Infrastructure Partners, or GIP, in respect of Vantage Towers AG, the German mobile telephone towers company, in which Vodafone currently holds a 81.7% stake.
Proposed Transaction

The transaction will be effected as follows:
  • Vodafone will transfer its shares in Vantage Towers to Oak Holdings GmbH (“Oak Holdings”), which will initially be a wholly owned indirect subsidiary of Vodafone GmbH but which will become the joint venture entity.
  • Oak Consortium GmbH (“Oak Consortium”), a holding company controlled by GIP and various funds advised by KKR, will acquire up to a 50% interest in Oak Holdings from Vodafone for at least €4.7 billion in cash, with the result that the KKR/GIP consortium will hold up an to 50% indirect interest in Vantage Towers, depending on the outcome of the voluntary tender offer described further below.
  • Oak Holdings will make a public tender offer for the Vantage Tower shares not held by it at a price of €32 per share. If it acquires at least 95% of the Vantage Tower shares, it can squeeze out the remaining minority holders pursuant to German law.

Vodafone and Oak Consortium have entered into a business combination agreement under which they will have “balanced governing rights in the JV, with equal voting rights.”

The transaction is expected to close in the first half of 2023, subject to regulatory clearance.
Change-of-Control Analysis

There has been some speculation in the market that this will result in a change of control under Vantage Tower’s outstanding bonds. However, the answer to this isn’t entirely straightforward.

Vantage Towers has three bonds outstanding issued under its €5 billion debt issuance program:
All are investment grade style bonds with no covenants other than a weak negative pledge (limited to other capital markets debt) and a noteholder put option at par upon a change of control, which is defined as follows:

“A ‘Change of Control’ shall be deemed to have occurred at each time (whether or not approved by the Management Board or Supervisory Board of the Issuer) that any person or persons (‘Relevant Person(s)’) acting in concert or any person or persons acting on behalf of any such Relevant Person(s), at any time directly or indirectly acquire(s) or come(s) to own (i) more than 50 per cent. of the issued ordinary share capital of the Issuer or (ii) such number of the shares in the capital of the Issuer carrying more than 50 per cent. of the voting rights;” (emphasis added)

The Case for a Change of Control Potentially Being Triggered

The argument in favor of this being a change of control under the bonds is based on the fact that the creation of the joint venture (i.e. Oak Holdings) and its acquisition of Vodafone’s shares results in a group of persons acting in concert holding more than 50% of the shares in Vantage Towers. This joint venture will hold Vodafone’s 81.7% and could potentially acquire up to 100% if the conditions for a minority squeeze-out are met.

This is a plausible argument. Vantage Towers is currently controlled by Vodafone. Following the transaction, control will be in the hands of the joint venture and shared among Vodafone, KKR and GIP. On that basis, this does look like a change of control.

The Case Against a Change of Control Potentially Being Triggered

The argument against is that this ignores the reality of what is actually happening, which is that Vodafone is using the joint venture to sell down its stake in Vantage Towers from 81.7% to between 40.85% (if the joint venture acquires no further shares) and 50% (if the joint venture acquires 100% through the public tender offer).

KKR and GIP almost certainly are acting in concert through their consortium entity, Oak Consortium, to acquire their stake in Vantage Towers, but they won’t end up with more than 50%. So Vodafone is ceding sole control, but the KKR/GIP consortium won’t acquire sole control.

On that basis, is there actually a change of control? The trigger is based not on Vodafone losing control but on someone else acquiring it.

So Is It a Change of Control or Not?

While it is not free from doubt, we think that the better view is that the proposed transaction does not constitute a change of control under the bonds on the basis that the Vantage Towers shares held indirectly by Vodafone should not be included in the calculation. Vodafone is not “acquiring” or “coming to own” any shares in Vantage Towers. Instead, it is selling down. Vodafone is losing sole control, but the KKR/GIP consortium is not gaining control either, which we consider to be a crucial difference.

Two things could lead us to change our view on this:
  • First, the terms of the business combination agreement have not been disclosed, other than that there are balanced governance rights in the JV, with equal voting rights. If it contained provisions giving KKR/GIC control rights above their 50% interest in the JV, that would change the analysis; and
  • Second, the bonds are governed by German law (of which we know little) and our analysis is based solely on the plain, English language meaning of the definition of “Change of Control”. There may be features under German law that would change our view, and the German language text is meant to be “controlling and binding.”
Note that even if the creation of the joint venture were deemed to be a change of control, the noteholder put will not be triggered unless the rating of the bonds assigned by any rating agency is either withdrawn or downgraded below investment grade (they are currently rated BBB- by S&P and Baa3 by Moody’s) within 90 days and the downgrading agency either announces publicly or confirms in writing to the issuer that the downgrade resulted in whole or in part from the change of control.

The joint venture entity will incur €1.6 billion of additional debt to fund the acquisition of shares from Vodafaone as well as the tender offer for the minority shares. Whether this does in fact trigger a ratings downgrade remains to be seen, particularly given that if incurred at the level of the joint venture, it will be structurally subordinated to the bonds.

On Nov. 14, Moody’s put Vantage Towers on review for downgrade, stating that it aims to conclude its review at or before closing of the transaction, but adding that it “currently anticipates that the completion of this transaction will likely trigger a change of control for Vantage Towers's existing bonds.”

S&P put Vantage Towers on “CreditWatch” with negative implications, stating that it expects to lower the rating by one notch on completion of the transaction, but does not state whether or not it thought it constituted a change of control.

Obviously, if the transaction is deemed to constitute a Change of Control, that will require Vantage Towers and/or the joint venture to come up with €2.2 billion to refinance the existing bonds (we understand that all the bonds are trading below par, so we’d expect most investors to put). There is no mention of that by Vodafone in its press release or presentation and we are assuming the company does not believe the transaction will trigger a put, probably for the reasons given above. But given that Moody’s and some others in the market seem to be of the opposite opinion, we expect we’ll be hearing more about this soon.
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