Australian revival

The Carlyle Group is moving towards closing the largest buyout in Australia since the market got squeezed by the global liquidity crunch sparked by the US subprime mortgage crisis in July.

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.