[MGSA-L] How private equity plundered profitable Greek telecoms company Hellas

June Samaras june.samaras at gmail.com
Sun Jan 8 14:38:53 PST 2012

How private equity plundered profitable Greek telecoms company Hellas


Helia Ebrahimi reports on the "exotic securities" and debt that
crippled the Greek mobile phone operator.

In 2005 Hellas was Greece's third-largest mobile phone operator. It
was a success story with just €166m of debt on its balance sheet,
generating €848m of sales, €234m of profits and serving 2.6m Greek
mobile phone users

By Helia Ebrahimi

9:40PM GMT 07 Jan 2012

Comments15 Comments

It was Warren Buffett who said: "It's only when the tide goes out that
you learn who's been swimming naked."

His point was that since time immemorial, companies that behaved most
irresponsibly during the boom are exposed in the bust. And nowhere was
this maxim truer than in Greece – save for one difference: even the
companies that behaved most sensibly were also dragged into the mire,
often helped along by private equity buyers and investment banks.

There are plenty of examples of where private equity bought companies,
over-leveraged them and left them facing potential collapse – but
rarely have they been quite as big and left as bad a taste in the
mouth as Hellas.

If the name sounds familiar that's because the company gained
notoriety two years ago when it came to the UK and went into
administration – Europe's biggest and most controversial pre-pack

In 2005 Hellas was Greece's third-largest mobile phone operator. It
was a success story with just €166m (£136m) of debt on its balance
sheet, generating €848m (£698m) of sales, €234m of profits and serving
2.6m Greek mobile phone users. More remarkably for Greece, it actually
paid its taxes.

That was before Texas Pacific Group (TPG) and Apax came calling. The
two private equity firms bought Hellas in a 2005 deal codenamed
"Project Troy". Within just two years the company had more than €3bn
of debt – 20 times what it had originally. Then the two firms paid
themselves a €1bn dividend just 60 days before they sold it to Egypt's
richest man, Naguib Sawaris, for €3.4bn. He renamed it Wind Hellas.

Roll on 2009, and Wind Hellas, beset by a suffocating debt burden,
arrived in the UK to face the administrators.

That much we knew. But only now are the gory details emerging of how
it happened.

As one senior private equity figure says, the Hellas story "is not a
good reflection of our industry".

"It was a free ride that took advantage of buoyant markets," he said.
"In 2006 the world was beautiful and we thought we could walk on

"Then the world went sour, and Greece went sour. And what happened to
Hellas is just very sad."

Sadness has also turned to recrimination. Now an array of legal cases
against private equity's most senior figures, including the
billionaire founder of Texas Pacific Group, David Bonderman,
investment bank Morgan Stanley, accountants Ernst & Young and Naguib
Sawaris, face legal filings from bondholders hoping to recoup some of
the billions of euros wiped out from their investments.

When it came to Hellas, there was an obvious case of the tide going
out – in that the Greek economy collapsed and then half a decade of
escalating valuations were shown to be overblown.

As one source involved in the deal said: "The situation in Greece
turned from growth to practically bust just as the telecoms market
became incredibly competitive there. Everyone, even Vodafone, has the
same issues in Greece."

The difference between Vodafone and Hellas was that Hellas was swimming naked.

"In Hellas' case there was an additional issue – the shareholder
decision to add so much debt and to take out the dividend from the
company," admitted the source.

"That type of refinancing, which gave firms a dividend payment,
happened in lots of buy-out deals at the time – it was the top of the
market and people thought they could get away with it. And if
performance had continued to grow – we probably would have. But it
didn't. For a large part it is an American-style of practice because
partners are almost always ex-bankers, so they know how to structure
deals and how to squeeze."

Bertrand des Pallières, chief executive of SPQR Capital, which was one
of the larger Hellas bondholders, blames its collapse on Apax and
TPG's move to heap debt on to the company while simultaneously
extracting cash from it.

"The private equity industry always pitches how constructive it is as
an investor force to create jobs and growth," says des Pallières. "But
there are private equity funds that get rich by breaking companies and
making others poor – whether they are creditors, states or employees."

TPG and Apax paid a total of €1.36bn for the company.

Project Troy delivered in excess of €20m in fees for the investment
banks Deutsche Bank, Lehman and Merrill Lynch, which provided most of
the money to buy the company. Company fillings show the private equity
duo also received fees worth €2m per year and €15m for "business
advisory services rendered in connection with debt placement and
preparation of business and strategic plans," according to the
company's 2005 annual report.

In April 2006 Apax and TPG added to the €1.26bn debt by raising an
additional €500m of Payment In Kind (PIK) notes. These instruments
ratchet high levels of interest that roll over every year, creating an
unmanageable problem if the company is not sold or refinanced within a
short time frame. The move prompted Standard & Poor's to downgrade the
company's debt.

Five months later rumours emerged that the company could be put up for
sale with a price tag of €3.5bn. But by December the sale process had
died. Instead, the two firms revisited the debt markets, which is how
the controversial dividend was paid. It was this process that has
caused Wind Hellas' newly-appointed liquidator to go after the private
equity companies in Luxembourg and why bondholders have targeted the
firms in New York.

TPG and Apax raised €1.47bn of bonds, which they told the market would
be used to "pay down deeply subordinated shareholder loan notes".

Holders of this debt claim they believed this would have helped
deleverage the company and make its debt more manageable. Instead, it
went straight to the two firms and added more leverage to Hellas.

The controversy centres on whether it amounted to a dividend or a
repayment of a loan. Dividends are only paid from retained profits
that can be distributed and Hellas had none in 2006 – its financial
performance had been declining and, because of interest payments, was
making a loss by the end of 2005.

The payment was called a "convertible preferred equity certificate"
that Hellas had issued to TPG and Apax in return for €40m.

These exotic securities can be accounted for as debt or equity, an
option that allows companies issuing them to choose whichever category
gives them the most tax advantages. Hellas classified the certificates
as equity. In April 2006, each certificate carried a value of €1, but
when they were redeemed in December 2006 the company redeemed 27.3m
and they shot up to €34.8 each, generating the €979m used to pay Apax
and TPG. In the company's 2006 accounts it says: "The excess paid over
par is accounted for as a dividend on the CPECs".

Just 10 days later, the value of the certificates fell back down to €1.

Both TPG and Apax would not comment on the specifics of the payment
but deny any wrongdoing. TPG said: "We have looked at these actions
and they are baseless – totally unfounded in law and in fact."

Apax responded by saying: "The plaintiffs' claims are nonsensical. As
the plaintiffs presumably know, Apax and TPG sold Hellas to a third
party for €3.4bn at virtually the same time the plaintiffs claim that
Hellas was insolvent. Moreover, it was not until approximately three
years later that the Hellas notes went into default. For these reasons
and others, we are confident that the plaintiffs' claims will not

In February 2007, less than two months after Apax and TPG gained the
windfall from their certificate payout, the firms sold Hellas for
€3.4bn of enterprise value, which included the €2.9bn of debt and a
cheque for €500m. They made a return of more than 4.5 times their
original investment.

Naguib Sawaris bought the company through Weather Group, using shares
in his telecoms company, Orescom, as collateral. These shares would
later collapse in value.

Sawaris also merged Wind Hellas with a fixed line telecoms company in
Greece called Tellas that he already owned. This netted Wind Hellas'
parent with a windfall, but lumbered Hellas itself with even more
debts. Tellas was also struggling operationally.

By the time Lehman Brothers collapsed in 2008 Hellas was in trouble.
In November, Tellas was making a €22m loss and investors were told
Hellas had under-performed expectations, and that 2009 would see
earnings flatten. The company also started an ill-fated price war that
cost it dearly. S&P again downgraded the business but referenced the
public declaration by Sawaris that Hellas' parent would guarantee
additional capital if needed.

By April 2009, earnings had begun to nosedive but the company kept
taking on more debt, which had ballooned to €3.21bn. Creditors were
told the company would end 2009 with €18.7m of cash on its balance
sheet. By May Hellas had started to take advice from Morgan Stanley
about a rescue plan.

Morgan Stanley's "communication strategy" for the company was
codenamed "Project Mist". Three months before the company issued a
profits warning and launched a restructuring, Morgan Stanley advised
Hellas to keep quiet about the possible extent of the liquidity
emergency and relay different information to different groups of

The company has different legal obligations to private bank lenders
than it does to bondholders that own publicly traded debt. Morgan
Stanley also says that the company needed time to develop a proper
restructuring plan and that it was not yet in a position to engage
with creditors.

The presentation says that the first objective for the company is
"minimiz[ing] investor distraction" while Hellas' parent was raising
€2bn. This was for another Sawaris company: Wind Italy – part of the
same Weather Group that owned Hellas – a strategy that has sparked
accusations from bondholders that Morgan Stanley was culpable of
misconduct, something they are understood to deny strongly.

After Wind Italy raised the €2bn bond, Hellas finally announced it
wouldn't be able to pay its debts.

In a move described as "jurisdiction shopping" Hellas relocated its
head office to London, allowing it to opt for a pre-pack
administration. The UK's law allows companies to dip into
administration, packaging off their debts and then be bought straight

In this case, as with many pre-packs, it was bought by the owner that
presided over the company's collapse: Sawaris. A deal was made with
senior lenders, but the junior bondholders were left nursing billions
of euros in losses.

Says des Pallières: "Private equity and banking can be very
constructive functions of the economy, but they will destroy this
industry if the leading players do not regulate themselves."

June Samaras
2020 Old Station Rd
Canada L5M 2V1
Tel : 905-542-1877
E-mail : june.samaras at gmail.com

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