By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The market for infrastructure assets is heating up. Yield-hungry investors are keen on large, predictable businesses in the less rickety bits of Europe. So auctions like E.ON’s sale of its German gas pipes run pretty hot. Even if the bets are less extravagant than during the credit boom, returns will suffer.

The 3.2 billion euro price tag for E.ON’s “Open Grid Europe” doesn’t look hair-raising: it’s in line with book value, and about 10 times EBITDA. Low-cost debt helps: Macquarie’s infrastructure fund, which teamed up with a Canadian money manager, Abu Dhabi’s sovereign fund, and a German insurer, got banks to stump up 2.2 billion euros or so of cheap loans, ahead of a likely bond sale.

Nonetheless, robust auctions tend to mean higher prices. To win, Macquarie had to fight off three other serious consortia. Rivals and sector-watchers reckon the Macquarie group paid at least 200 million euros more than the next bidder, and question how it will achieve its target 10-percent plus internal rate of return from the investment.

Of course, business plans differ, although regulators probably limit a buyer’s wiggle room. Macquarie may also be more optimistic about an eventual exit price. And today’s low-yield world is undoubtedly compressing return expectations for all investors, not just in infrastructure.

Still, lower anticipated returns also reduce the margin for error. Like Vattenfall’s sale of its Finnish assets late last year, the E.ON disposal is a reminder of how much cash is chasing assets. That appetite comes both from infrastructure funds and from other enthusiasts for long-term investments, such as stewards of pensions and petrodollars.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Private equity’s bubble hangover has brought staffing headaches – and Terra Firma is suffering acutely. Guy Hands, the boss of the British buyout firm, is dipping into his own pocket to fund 20 million pounds of bonuses for employees over the next two years. The largesse is a necessary step to keep staff through an otherwise lean period. But Hands has made life particularly tricky for himself.

The industry used to be a millionaires’ factory. “Carried interest” typically gives private-equity partners a 20 percent share of profits from a successful fund, usually above an 8 percent annual return hurdle. For large funds, fees based on assets managed can also bring in sizeable annual sums, which cover a firm’s running costs and big salaries too.

Promises of great wealth ring less true now. For ambitious staff, hedge funds and even banks can start to look like more alluring destinations. The boom years were full of expensive, over-leveraged buyouts. Some collapsed, while others have proved hard to sell on to corporations or stock-market investors. In September last year, the median European buyout fund raised in 2007 had generated a median internal rate of return of just 0.6 percent, Preqin says. True, these funds run until 2017. But some will struggle ever to generate carry. And investors are being pickier about backing new funds.

Terra Firma has a bad case of this, and that’s largely its own fault. Partly the problem is insufficient diversification. Its 2007 fund is 40 percent underwater, after the firm lost a total 1.75 billion pounds on EMI, the record label. The fund could yet break even, but may never pass the carry hurdle. A follow-on fund is at best some way off. And as is typical, management fees have halved after five years, as the fund switches focus from buying to selling.

Then there’s weak cost control. Hands is to pay 10 million pounds annually for the next two years, lifting Terra Firma’s salary and bonus bill to about 50 million pounds. For a 100-person firm, with about 60 “investment professionals”, that implies an average payout of 500,000 pounds, including non-financial staff. That seems an extraordinary reward at a firm whose current fund may at best return investors their original stake.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Deutsche Bank’s unhappy Actavis saga shows just how long bad lending decisions can reverberate. Finally a $5.6 billion-plus cash takeover by generic drugmaker Watson Pharmaceuticals offers an exit.

Actavis’s 2007 buyout, by Icelandic tycoon Thor Bjorgolfsson, belongs to a different age. Bjorgolfsson was then reckoned among the world’s richest people and the Actavis deal was worth $6.4 billion including debt – five times the value of Iceland’s biggest listed company today. Deutsche employed bubble-era tactics too. The loans totalled a reported 4 billion euros, including 1 billion of “payment-in-kind” notes. These are particularly risky, since instead of paying interest in cash the PIK-note debt burden expands.

The deal backfired. The credit crunch made the debt unsellable and Actavis wobbled, operationally and financially. Merger and sale attempts flopped. A 2010 restructuring handed Deutsche significant control, including board seats and other rights, but no equity. The bank recorded 545 million euros of “charge-offs”, and shifted the debt into a “non-core” sin bin alongside a Vegas casino. Impairment charges of 457 million euros followed in 2011.

The new owner is not doing too badly, though. Actavis had actually built a major international business through dozens of acquisitions, despite sometimes skimping on integration. Watson’s $5.6 billion offer equates to 2.3 times 2011 sales and 13.8 times EBITDA. That is roughly in line with the mean 3.3 times historic sales and 14.7 times EBITDA for generics deals, Credit Suisse data show. Watson also targets $300 million of annual synergies – about 12 percent of Actavis sales – and should reap big tax savings from combining with a firm that recently moved to Switzerland.

With limited disclosure, it is hard to gauge exactly how Actavis’s owners and creditors have fared. It is not clear what smaller creditors were owed or received. Bjorgolfsson and minority shareholders – probably including kaput Icelandic banks – presumably received something for their consent. They could receive 250 million euros more in Watson shares, depending on future performance.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Spotify’s pitch to prospective shareholders looks ambitious. The online music-streaming firm boasts rapid growth and a popular friend in Facebook. But it lacks the economics of the best dot-com hits.

The Swedish company is seeking investors to put up a maximum of $200 million at a valuation of between $3.5 billion and $4 billion, according to a person familiar with the matter. That enterprise value would put it somewhere between high-tech U.S. radio outfits Pandora Media, at $1.4 billion, and Sirius XM, which is worth nearly $17 billion after adjusting for unconverted preference shares.

Spotify boss Daniel Ek says revenue could soar 160 percent this year to $890 million, implying new investors would be buying in at maybe 4.5 times 2012 sales. That would put the not-yet-profitable Spotify closer to Sirius, which trades on an adjusted EV of 5.1 times revenue and should generate $875 million of EBITDA this year, than loss-making Pandora, on 3 times.

Some investors might reckon extra growth justifies the price tag. Uptake is brisk: this year’s big milestone could see it hit 100 million users. A recent launch on Facebook, itself nearing a billion users, promises much.

But business models matter too. Sirius generates most of its revenue from paying subscribers, while paying low, capped royalty rates for satellite broadcasting. By contrast, Pandora relies on advertising and, as a webcaster, pays more than half of its revenue to rights owners.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

International Power’s independent directors have done a decent job in securing a better buyout from GDF Suez. It’s not that easy to extract a big premium when a bidder is already a 70 percent shareholder. But the terms of the original tie-up helped, as did GDF’s evident keenness to take full control of the emerging-markets focused power generator.

Last year’s complex shares-and-assets tie-up secured GDF effective control but left unfinished business. GDF can now afford to take full ownership without hurting its balance sheet too much, while Europe’s crisis must have erased any doubts about re-focusing on fast-growing countries where power demand is surging. That divergence probably also helps explain an outperformance in International Power’s shares; GDF probably wanted to move before that gulf widened further.

Still, any bid before August required the approval of International Power’s independent directors. They sensibly rejected GDF’s 390 pence opening gambit as too low. True, GDF is not usually a hostile bidder, but that standstill agreement gave the target board a bit more power, as did some other terms such as a higher threshold for any delisting.

At 418 pence a share, the new and agreed 6.8 billion pound ($10.8 billion) offer is 7 percent higher. Investors will also keep a dividend, which wasn’t previously specified. Factor in recent bid speculation, and the premium moves closer to that in a standard takeover – even though GDF was already in the driving seat. GDF reckons the rumour mill really got going in late February and estimates a 21 percent premium to the undisturbed price. But the first reports appeared a month earlier: go back that far, and it looks like 26 percent.

In earnings terms, too, the buyout looks robust. Analysts polled by Starmine expect International Power to earn about 0.31 euro cents a share this year, valuing the buyout at about 16.4 times earnings – roughly 50 percent above its median 10.9 times over the past decade. It also beats the 11.8 times current-year earnings on which Europe’s utilities trade – although the sector is full of duller outfits. Factor in wobbly markets, and International Power shareholders look to have been served well.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Skoda cars and MAN trucks, meet your potential Volkswagen stablemates: 186-mph superbikes. No-one walks into a showroom after a cheap family car and screeches out on a blood-red Italian motorcycle. But Audi’s ambitions to buy Ducati would make some sense for VW’s luxury marque. And even with an appropriately macho price tag, the deal could pay off if Audi turbo-charges Ducati sales in emerging markets.

Motorbike valuations are in a different league to the big automakers. A deal at 875 million euros, the high end of earlier reports, would value Ducati at more than 1.8 times 2011 sales and 9.3 times EBITDA. That’s below U.S. peer Harley-Davidson, which fetches 3.1 times sales. But it’s far above VW itself, which trades at just 0.3 trailing sales and 5.5 times EBITDA.

Nor are there big cost savings. Maybe some engine know-how can be shared, and Ducati should be able to buy raw materials and borrow money more cheaply, among other things. But Audi clearly can’t reap the huge savings that come from combining carmakers – where similar-size vehicles can be built using common platforms, engines and parts. Still, Audi might persuade some dealers to stock both two- and four-wheelers, as happens with arch-rival BMW.

The sale could yet fizzle out. Ducati’s main owner, Italy’s Investindustrial, now says talks with VW are no longer exclusive, which doesn’t sound promising. But any successful deal would be tiddling for Europe’s largest carmaker, whose operating profit hit 11.3 billion euros last year.

And perhaps Ducati’s celeb-endorsed bikes are best understood as a leather-clad version of all the other luxury brands that are storming the emerging world. In that case, VW’s experience, connections and marketing nous could be a big help. In China, for example, VW is among the biggest foreign players. Audi sold a record 90,000 cars there last quarter. Ducati’s Asian sales leapt 75 percent last year, but were still just 11 percent of the total.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The stock market has already done half the job for International Power’s independent directors. Two months of rumours of a full buyout from 70-percent owner GDF Suez have added something of a premium to the power generator’s shares. But now there’s official confirmation of a likely 6-billion-pound bid, IPR non-executives still have some power to push for a little more.

GDF Chief Executive Gerard Mestrallet wants a simpler company and an even clearer hold over the emerging markets-heavy IPR. So he’s has pitched an indicative, cash proposal at 390 pence a share. That’s a scant premium to the previous close, on March 28, of 383.4 pence. But it’s better understood as a 17 percent premium to where the shares traded two months earlier, before the rumour mill cranked up. The FTSE-100 is little changed over the same period, and GDF’s shares are down 6 percent.

The market, reasonably, intuits there may be a bit further to go: the shares were hovering around 405 pence on the morning of March 30. True, securing a big premium from a majority shareholder is counter-intuitive: there’s no chance of a rival bidder, and the standard M&A notion of a “control premium” doesn’t really apply. But by pre-empting an 18-month standstill agreement that runs until August, GDF has shown how much it wants full ownership now – perhaps fretting it could otherwise end up paying even more later.

IPR’s leverage comes because while the standstill agreement holds, any bid requires the approval of its six independent directors, led by senior independent director Neville Simms. GDF also can’t delist the company until it holds 85 percent, rather than the standard 75 percent. That defangs a standard threat used to bully minorities: accept a lacklustre offer or risk being left with untradeable stock. On the other hand, unless major outside shareholders start publicly dissenting, a smallish bump will probably do the trick. Investec reckons the stock is worth 417 pence a share, for example.

The clock is now ticking towards an April 26 bid deadline and the impetus to secure an agreement by then is strong. The market has got Simms et al so far. The final price will depend on pure negotiating savvy.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

UPS’s 4.9 billion euro ($6.4 billion) love letter validates TNT Express’s recent divorce. The U.S. parcel service has admired its smaller Dutch peer for years, and proposed just before Valentine’s Day. TNT is thinking about it. But clearly its 2011 split from PostNL, the dowdy domestic mail business, is finally achieving the desired effect.

While traditional postal services struggle with email and upstart competitors, the express industry – rapid international deliveries, courier services, and parcels – has fared better. But the sector still cries out for consolidation, because zipping packages worldwide is a scale game. Hence last year’s TNT-PostNL separation, under pressure from activist investors.The newly single TNT made a clear bid target: sizeable in Europe, but globally lagging UPS, FedEx, and Deutsche Post’s DHL, and struggling to make money in Brazil and China.

UPS’s 9 euros-a-share all-cash bid may look first class, pitched at an outsize 43 percent premium to TNT’s previous close. It values TNT at 10.4 times the 470 million euros in EBITDA that Nomura estimates it will make in 2012. UPS trades at 9.8 times current-year EBITDA and FedEx at just 6.1 times, Starmine data shows.

But TNT is right to drag its feet. The offer is still a 5 percent discount to the shares’ first close post the demerger. Investors weary with the weak performance of TNT shares since the separation will not be easily appeased.

Big synergies, based partly on combining ground and air fleets, could justify UPS going higher. Barclays Capital reckons it could reap $451 million in annual gains if it gets TNT’s margins up to its own. Taxed and capitalised, these are worth perhaps $3.4 billion – against the $1.9 billion premium currently on offer. But disposals to appease antitrust regulators may pare back the value creation to something less stratospheric: on BarCap’s figures, UPS already has 23 percent of Europe’s international express market, and TNT 16 percent.

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

How many banks does it take to put together a friendly, all-share merger – and one that’s been on the cards for years anyway? If the companies are Glencore and Xstrata, the punchline is seven – plus a lone banker acting as go-between. And despite the abundance of expensive wisdom informing the negotiations, this mega mining deal clearly needs wider shareholder support.

To be fair to Glencore, the commodity trader is using only using two key banks – Citigroup and Morgan Stanley. That’s pretty much the minimum for multi-billion dollar transactions today. But Xstrata has five – Deutsche Bank, JPMorgan, Goldman Sachs, Nomura and Barclays Capital.

To be sure, any big deal is complicated. And you’d expect Xstrata to need more help: it is selling out to its biggest shareholder and must be seen to be crafting a fair deal. But it still seems a bit much. Barcap’s role as “equity adviser” stands out. There’s no significant financing required, whether in debt or equity, and the two companies are already semi-merged thanks to Glencore holding a 34 percent founding stake in its target. Moreover, Deutsche and JPMorgan are playing the additional role of UK corporate broker – a specialist service focused on relationships with core investors.

Still, ties between corporations and their advisers are long term. It’s not unheard-of for CEOs to appoint banks as a reward for past services or to keep them sweet for future mandates. Even if the actual involvement and cash fees are low, the engagement brings all important league-table credit and bragging rights.

Gamesmanship over rankings is unedifying, but does it matter much? After all, it’s hard to get too worked up about the sanctity of league tables. A huge line-up could hurt shareholders’ interests if independent research was silenced, or a counter-bidder couldn’t find funding and advice. But several big investment banks remain unconnected to the deal, so such worries look surmountable.