Macquarie Bank Agrees to Buy Telefonica's Airwave O2

By Joyce Moullakis and Tina Morrison

April 19 (Bloomberg) -- Macquarie Bank Ltd. agreed to buy the U.K.'s police and emergency services radio network from Telefonica SA for GBP 1.9 billion (USD 3.8 billion), gaining a business targeting as much as 30 percent sales growth this year.

Two funds managed by the Sydney-based bank will each own 50 percent of Airwave 02 Ltd., they said in a statement today. Macquarie is the world's largest private manager of infrastructure such as roads, airports and parking lots.

The purchase adds clients at Britain's defense ministry, police, fire and ambulance services to Macquarie funds that already control communications networks used by Vodafone Group Plc and France Telecom SA's Orange. Telefonica, which has more debt than any other major European phone company, is selling Airwave after divesting its phone directory unit last year.

“The U.K. market is attractive because it is well developed,” said Fabian Babich, an analyst at BBY Ltd. in Sydney. “It is relatively low risk because it's an expansion in an existing market area.”

Telefonica's debt topped EUR 50 billion (USD 68 billion) after buying Airwave's parent O2 Plc in 2006. The Madrid-based company also plans to sell TV production unit Endemol NV.

Airwave posted earnings before interest, tax, depreciation and amortization of AUD 235 million (USD 195 million) in the 2006, up from AUD 205 million a year earlier, according to unaudited management accounts provided to Macquarie.

Sales Growth

It will generate “significant” earnings growth on sales that are forecast to increase up to 30 percent in 2007 and 2008, according to the statement from the two Macquarie funds.

Macquarie Bank and its partners have made USD 31 billion in acquisitions over the past year as the bank bundles assets into funds it oversees for investors and manages for a fee.

Macquarie Communications Infrastructure Group and Macquarie European Infrastructure Fund II will own Airwave.

The acquisition will be funded by GBP 1.5 billion of debt and GBP 528 million of equity, according to the statement. Macquarie Communications plans to raise AUD 625 million in a share sale to institutions, and the same amount in an offer of exchangeable bonds. A further AUD 100 million may be raised, depending on demand.

Macquarie, UBS AG and ABN Amro Rothschild are managing the sale. Telefonica hired JPMorgan Cazenove to advice on the sale.

Long-Term Investment

Shares of Macquarie Communications, which have gained 8.7 percent in the past year to AUD 6.15, were halted from trading on the Australian Stock Exchange while the funding arrangements are completed. Macquarie Bank shares fell 1 percent to AUD 86.80 in Sydney. The stock has risen 26 percent in the past 12 months.

“Macquarie is investing in Airwave for the long-term, our funds have formally committed to this investment for a minimum of 10 years.” Jim Craig, Macquarie's head of Europe, said in the statement. “There is potential to leverage the company's skills and unique know-how in the international field as overseas governments modernize their emergency communications.”

Macquarie Communication increased its forecast distribution payment “to approximately” 10 percent growth for 2008 and 2009, from 5 percent to 10 percent growth expected previously. It forecasts a payment of 42 cents for fiscal 2007.

The capital raising will likely put “some pressure” on Macquarie Communications' stock, Alison Booth, an analyst at Goldman Sachs JBWere said in a note to clients today. She expects stock will be sold to institutions at AUD 5.80 to AUD 6.10.

Sydney-based Macquarie Communications is expanding its network assets in the U.K. This month it also agreed to buy the U.K. wireless network division of National Grid Plc for GBP 2.5 billion to combine the unit with its Arqiva broadcast business. Macquarie in 2004 led a group which bought Hampshire, England-based Arqiva, which offers networking services to broadcasters and mobile-phone companies.

In October, Macquarie Bank led a group that agreed to buy Thames Water for GBP 4.8 billion in its biggest purchase. The group included Macquarie European Infrastructure Fund II, which is closely held and aims to invest in transport, ports and utilities across the European Union.

Last Updated: April 19, 2007 10:45 EDT