UNFAIR VALUE?

Deutsche Telekom has several sets of shareholders sweating.

The German telecom company, set on a path to privatisation some 12 years ago, has seen its stock price sink as much as 30 percent in the past year. It recorded a €757 million ($1.2 billion) first-quarter loss. And it had its long term rating downgraded to Baa1 from A3, following the €3.2 billion purchase of Marfin Investment Group's stake in Greece's Hellenic Telecoms Organization.

Deutsche Telekom chief executive, Rene Obermann, has sought to assure shareholders that the firm's aggressive international expansion plans, rumoured to include a buyout of Sprint Nextel to augment its T-Mobile USA business, are not for the sake of expansion alone, but to add value. This, and weathering credit dislocation affecting the telecom sector, will take time, he told shareholders, according to media reports.

“I can't perform magic,” Obermann cautioned. “This is hard work that requires trust and patience.”

The Blackstone Group has similarly urged patience among its unit-holders. The publicly traded alternative asset manager made headlines in 2006 when it paid €2.68 billion to purchase a 4.5 percent stake in Deutsche Telekom from German state-owned development bank Kreditanstalt für Wiederaufbau, a first-of-a-kind transaction for the firm.

However, when Blackstone announced a $116.7 million first quarter loss in its private equity division in May, it largely attributed it to the investment in Deutsche Telecom. The telecom company's declining share price, coupled with fair value accounting standards causing numerous buyout firms to write down investment values, were the main reason for the loss, the firm said.

Blackstone blames the accounting rules more than Deutsche Telekom, whose swooning share price, the firm argues, has more to do with declines in the German stock market and telecom stocks than the company's real value.

“I believe [fair value accounting] is well-meaning and frankly a desirable goal, but it's fraught with misleading results and it's dangerous,” Blackstone president Hamilton James said during the firm's earnings call.

“We are pleased with [Deutsche Telekom's] management team, the new leadership at the supervisory board level, and continue to believe this investment will deliver attractive returns to our LPs,” he said.

Blackstone characterised the company as “strong” in a statement, saying it is trading at an attractive valuation of 4.7x EBITDA. It remains to be seen whether the buyout giant will feel that way when its two-year share lock-up period ends.

TPG CONCLUDES NINE-YEAR BALLY TURNAROUND
TPG Capital has exited Bally, the Swiss fashion company, to Joh A Benckiser, a family holding company, after nine years ownership for an undisclosed sum, according to a statement. An analyst estimated the sale price was around CHF600 million (€373 million; $596 million). Bally has sales of approximately CHF500 million, according to a source close to the bid. The company was loss-making when TPG bought it in 1999, the source said. Bally derives 50 percent of its sales from shoes, 40 percent from bags and accessories and the remainder from ready-to-wear fashion. Bally has around 250 branded stores and 750 sale points worldwide. TPG appointed Marco Franchini as chief executive in 2002 to lead a major restructuring of the company. This involved changing distribution and production, consolidation of the brand identity and refurbishment of the retail network. In 2007 TPG appointed Brian Atwood as creative director.

COLONY, EURAZEO BACK ACCOR GROWTH PLANS
Colony Capital and Eurazeo will increase their stake in Europe's largest hotel owner, Accor, to 30 percent as the company plans a large expansion of its business. Los Angeles-based Colony said it plans to increase its stake in the hotel group to 20 percent from nine percent, while Paris-based Eurazeo said it would raise its stake to 8.5 percent by May 13, and to 10 percent “in the months to come, by the end of the year at the latest”. Virginie Morgon, a member of Eurazeo's executive committee, said in a conference call the firm would also be seeking board representation. Eurazeo said plans to increase its stake represented a €1 billion ($1.55 billion) investment, funded with €539 million of equity and €538 million of debt. A spokesman for Colony declined to comment on financial details.

DFJ ESPRIT FIRM IN TELECOM MERGER
Imagine Communications Group, an Irish telecoms company backed by DFJ Esprit, a UK venture capital firm, has merged with Irish Broadband, owned by NTR, an infrastructure investor, and Kilsaran Concrete, an Irish construction company. Irish Broadband's owners will invest €7 million ($11 million) and take a 25 percent stake in the combined group which will have yearly revenues of more than €100 million. The deal values the combined group at €184 million, and the acquisition was on a debt-free basis. DFJ Esprit invested €12.5 million in Imagine in 2006 for an undisclosed stake when the company had revenues of €11 million.

SAFETY KLEEN CHANGES HANDS IN SECONDARY
Warburg Pincus, the global private equity firm, has bought Safety Kleen, an industrial cleaning company, from CCMP Capital for £565 million (€715 million; $1.1 billion). Safety Kleen was bought by CCMP for £273.5 million in 2004 when it was part of the captive private equity arm of JP Morgan. CCMP raised $3.4 billion (€2.2 billion) for its first independent fund last year after it span out from the bank in 2006. Safety Kleen operates cleaning equipment for more than 100,000 customers using cars, trucks, engines, or industrial production lines, as well as providing 60,000 customers with non-machine cleaning services. It has 1,400 employees. Peter Wilson, a managing director at Warburg Pincus, said the company's debt had been 100 percent underwritten by RBS, the existing lender to Safety Kleen, although Warburg Pincus had been contacted by several other interested lenders.

PERMIRA SELLS DEBITEL, GETS FREENET STAKE
Permira has sold portfolio company Debitel to German telecom giant Freenet for €1.63 billion ($2.55 billion) in a move that will create Germany's third-largest mobile phone company. As a condition of the deal, Permira will receive a 24.99 percent stake in Freenet, or roughly 32 million shares, according to a statement from Freenet. Permira will also be issued a long-term €132.5 million interest-bearing loan note from the combined entity. In 2004, Permira purchased a 95 percent stake in Dusseldorf-based Debitel from Swiss telecom company Swisscom for €640 million. Three years later, Permira oversaw Debitel's €560 million acquisition of Danish mobile services provider Talkline.

HITECVISION DIGS DEEP FOR EXPLORATION FIRM
Norway's HitecVision Private Equity has bought a majority stake in Spring Energy Norway, a start-up oil and gas exploration and development company, for $120 million (€76 million). Spring Energy aims to become licensed to work on the Norwegian continental shelf before mid-2008 and to become an operator in 2010. The founders of Spring Energy will remain shareholders in the company. In February HitecVision closed its fifth investment vehicle and its third private equity fund on $800 million, surpassing its $600 million target. The deal is HitecVision's second from the fund following the buyout of Hitec Products Drilling for an undisclosed sum last month.

AXA TAKES CONTROLS AT ARCADE FIRM
AXA Private Equity, the private equity arm of financial services giant AXA, has bought Löwen Play, the German arcade operator, from Waterland Private Equity, the Dutch mid-market GP. Terms were undisclosed, but business magazine The Deal said the transaction was worth more than €300 million ($478 million). Löwen Play has revenues of more than €85 million and 215 arcades in Germany, making it the second-largest arcade owner in Germany. The German market has 5,000 providers and 8,000 individual arcades, with combined sales of approximately €3. 2 billion. Waterland bought Löwen Play for an undisclosed sum in 2006, when it owned around 160 arcades.

CORRECTIONS
On page 24 of PEI 65, published in May, we incorrectly referred to General Atlantic as a Bostonbased private equity firm. General Atlantic's headquarters is in Greenwich, Connecticut. In the same edition, on page 103, we failed to mention Serge Raicher as one of the five founding trustees of the European Venture Philanthropy Association.We apologise for the omission.