How private equity is behind the latest loss from London’s stock market

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The lowly valued UK stock market makes a tempting target for private equity buyers. Companies in the throes of a cyclical slump make the choicest morsels of all.

That thinking should apply to strategic buyers too except that, rather than sitting on dry powder, they may be suffering a downturn of their own. The solution? Get a private equity fund to finance your bid.

That is the route Nasdaq-listed Viavi has chosen to go down. The $2.3bn telecoms equipment maker has made a recommended £1bn bid for London’s Spirent, which will be partly financed via a $400mn convertible pay-in-kind toggle loan from Silver Lake. Such private investments in public equity — or PIPE — deals are relatively common in the US, offering private equity houses a downside-protected route into a company’s share capital. Silver Lake itself made a similar investment in Germany’s Software AG, which it ended up acquiring.

The attraction, from Viavi’s side, is clear. Spirent, which sells equipment to test telecoms networks, is a good strategic fit. Products are complementary, meaning they can be cross-sold to the two groups’ existing customer base. Operating costs can be cut, to the tune of $75mn — equivalent to about half of Spirent’s 2023 ebitda.

And this is the right time to swoop. Spirent’s stock has been in freefall. While Viavi’s offer represents a premium of more than 60 per cent to Monday’s close, the UK group was trading at that level as recently as last summer.

Yet Viavi would have struggled to finance a bid had it plumped for straight debt. The US group is suffering its own squeeze, with 2024 ebitda projected to hit $165mn, down from $260mn in 2022. It does not have much leverage. But the £1bn it is shelling out for Spirent means the combined group would be saddled with a net debt to ebitda ratio of about 7 times, Lex calculates.

That is where Silver Lake comes in. Its $400mn convertible looks relatively cheap, yielding 4 to 4.5 per cent for a duration of 7.5 years. Viavi might have had to pay perhaps 8 per cent for a loan of similar size and duration. The telco can also pay interest in kind, which adds flexibility.

Silver Lake is extracting its pound of flesh. Its loan is convertible into Viavi stock at $10.22. Viavi’s stock opened higher than that on Tuesday. That gives it an in-the-money option to acquire 15 per cent of the new group, which could be very valuable if the telecoms cycle ever turns.

Another win for private equity; not so much for London.

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