Reuters recently announced that a group called BC Partners will buy Springer for 3.3 billion euros. Of this, 2.5 billion is debt – backed by Barclays, Credit Suisse, Goldman Sachs, JP Morgan, Nomura and UBS. This debt is described as “covenant lite,” a structure that offers little or no protection for lenders via financial tests”.
This makes no sense at all from a financial perspective. Why buy a company whose traditional high profits are based on an outmoded model that currently enjoys revenues at 4-5 times higher than what is necessary for normal profits in an emerging open access environment for scholarly publishing that is just beginning to open up to competition – including competition on price? Even if it made sense to buy the company, how could it possibly make sense to load the company with debt? If you’re going to take risks like this, wouldn’t it make sense to look for more rather than less guarantees?
On the surface this looks a lot like the sub-prime mortgage situation – go ahead and lend money even though this obviously makes no sense at all – and appears to involve some of the same companies. Am I missing something here?