Australian revival

The Carlyle Group is set to break a dry spell in Australia after winning over the board of Coates Hire, a listed equipment hire company, with a A$2.2 billion ($1.97 billion) offer to acquire the company in partnership with National Hire, a Coates competitor.

After failing twice before to buy into Australia's largest equipment rental company, Carlyle and National Hire finally secured the company's backing with an offer of A$6.59 a share on an ex-dividend basis, A$0.30 a share up from the second offer and representing a 37 percent premium to Coates' closing share price of A$4.80 on 5 April, the day Carlyle made its initial approach. The valuation equates to 13.3 times the company's earnings before interest and tax for the year to 30 June 2007.

Coates' non-executive directors have “unanimously determined to recommend this offer to its shareholders”, according to the prospective buyers.

Carlyle and National Hire have formed Ned, a new company in which each will hold a 50 percent voting interest to acquire Coates. Carlyle, which has yet to complete an acquisition in Australia, will contribute A$339 million in cash. National Hire will fund its equity contribution by transfering its own equipment rental operation valued at A$282 million and injecting A$57 million in cash.

The proposed transaction, if completed, will be the largest buyout in Australia since the US subprime problems tightened credit markets worldwide. It reflects a return to more modest transaction sizes after a number of high profile deals such as Qantas and Coles valued in excess of A$10 billion fell apart earlier this year.

Bankers have warned in recent months that larger deals would probably struggle to get financing while deals in the vicinity of A$2 billion are more palatable. Terms are also more attractive for lenders with higher upfront fees and interest spreads.

A syndicate of six banks comprising ANZ, Westpac, ABN AMRO, Calyon, Mizuho and Sumitomo Mitsui are involved in the financing of the Coates deal. The debt involves a A$2.26 billion senior loan comprising a A$2 billion term loan and a A$260 million working capital facility. In addition, Goldman Sachs is underwriting a A$150 million mezzanine tranche, according to a banker familiar with the structure.

Prior to Coates Hire, Pacific Equity Partners entered into a A$440 million deal with Australia's PBL and West Australian Newspapers to buy their shares in Hoyts in a deal that is expected to return each seller approximately A$150 million.