KEY POINTS:
This week's Yellow Pages purchase is the most highly-leveraged private equity deal so far in Australia and New Zealand.
And New Zealand retail investors, who will be asked to help fund the deal, will need to think long and hard before they stump up any cash.
The $2.24
billion paid to Telecom by CCMP Capital and the Teachers' Private Capital for the Yellow Pages directories business is $1 billion more than the price paid for Independent Liquor, the previous largest private equity deal in New Zealand.
Telecom can be very happy with the price. At 13.2 times Yellow Pages' forward earnings, the deal is the most expensive private equity transaction in Australasia.
But what is truly eye-watering is the amount of leverage.
It is understood that the buyers will put in roughly $650 million in equity and fund the rest of the deal - about $1.6 billion - through debt. That puts the debt portion of the deal at more than 10 times current earnings - a new high water mark for leverage in this part of the world.
To put this in perspective, a year ago typical deals were funded with debt levels of about five times earnings.
And even as recently as December when CCMP Capital Asia and Pacific Equity Partners bought Independent Liquor and put leverage of about seven times earnings on the business, that was seen as aggressive.
However robust and stable the Yellow Pages business is and however much potential it has, this is an unprecedented level of risk. And you'll be asked to help fund it.
It is understood the new owners will try to raise up to $300 million through a capital notes issue to New Zealand retail investors.
The reason the private equity owners will raise some of the money on the debt market with all the bother that entails - issuing a prospectus and marketing the notes - is that it's cheaper than borrowing money from the bank. New Zealand mum and dad investors price risk differently than the banks do.
They're more likely to be attracted by the headline interest rate, and overlook the fact that this is a highly leveraged deal and that they'll rank below the taxman and the banks if things go wrong.
There's another bonus for the private equity firms in issuing capital notes. It means they've already got a start in the marketing of an initial public offering should they eventually decide - and they probably will - to float the company.
When it comes time for the float, there will be a pool of investors who will be looking for a new home for the cash that's just been returned to them from their capital notes.
And as an added carrot, the owners are planning to offer a 2.5 per cent discount on the share issue price to the capital notes holders in the event of a float.
Yellow Pages is just the sort of business private equity investors like - its strong, stable cashflows resulting from its near monopoly position allow it to pay off significant amounts of debt.
And there's also scope to boost earnings.
Yellow Pages has one of the highest advertiser penetrations among directories business in the world. Yet it has one of the lowest average revenues per user. The new owners will be hoping to increase average revenue by offering a wider range of services to advertisers, mainly through the internet.
All of that should give potential capital notes investors some comfort. But this transaction with its high leverage is not without its risks and investors will still need to ensure that they're adequately compensated before they open their wallets.
The right price That the average wage earner has to spend 92 per cent of his or her income to service the mortgage on the average Auckland house is a terrifying statistic - or would be if it weren't a nonsense.
The figures in themselves are correct. To service a mortgage on the average Auckland home at $430,000 with a 20 per cent deposit, an average earner would have to spend $627 of their $682 weekly take home pay - leaving them with just $55 to meet all other living costs.
But as to whether there would be anyone actually in this situation, the answer would have to be no. This data fails to match the sort of houses people would be buying with their income. Single people or one income families on the average wage do not buy average houses. They buy cheaper houses.
The problem is finding enough of them in a crowded city like Auckland.
What the data did show was what we already knew - that houses are getting less affordable as property prices rise faster than wages and rising interest rates increase mortgage payments.
But this won't last forever. Interest rates will fall, wages will rise and house prices will stop rising.
The housing affordability crisis isn't so much a crisis as the top of a property and economic cycle that seems as if it will last forever. But it won't.
