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Pensions Corporation buys out Telent shell

UK - Edmund Truell's Pension Corporation has agreed a £400m (€570.5m) takeover bid for Telent plc, the UK telecoms equipment making arm of the Marconi group.

Co-Investment No.5 LP Incorporated (CILP), which is part of Pension Corporation, has agreed a 600p a share deal with the company's management for what is essentially a shell supporting the old General Electric Corporation pension fund.

CILP said it also has unconditionally agreed to acquire a 26.4% stake, on top of the 3% interest it already held in the company, but the deal now has to approved by shareholders.

Commenting on the deal, Edmund Truell said: "The strength of Telent's UK pension fund is vitally important to over 62,000 people; a legacy from what was once the second-largest industrial company in the UK. We intend to apply Pension Corporation's market-leading pensions investment and administrative approach to support and enhance the management of the GEC plan."

Telent, effectively the rump of the old General Electric Company (GEC)/Marconi business, was last year the subject of conflicting takeover bids from Fortress Investment Group's Holmar and Polygon Investment Partners.

The company had agreed a £346m takeover in August last year with Fortress, until it was blocked by Anglo-American hedge fund Polygon.

Potential bidders tried to find a way to access Telent's £490m escrow account, set up to assist the £3bn former Marconi pension fund after the company was broken up.

However, it was found funds in the escrow account could only be released if either the total of the pension plan assets and the escrow account exceeded 105% of the buyout value of the fund, or if a buyout had been completed and surplus funds remained in the account.

Telent said at the time: "At present, the board has been advised that a buyout of the pension plan would cost in the region of £3.7bn which means that a release from the escrow account would only be possible if the cost of a buyout reduced by more than £500m."

John Devaney, chairman of Telent, said yesterday: "We believe the cash offer of 600p per share from Pension Corporation is a compelling one for shareholders, given the prospects for the operating company and the position of the UK pension fund."

He added: "The offer represents an attractive premium over the pre-bid price and shareholders will also receive the dividend of 11p per share that has already been approved. This is a good outcome for shareholders and will allow the management team to focus exclusively on the development of the operating business."

Telent has said there is no certainty funds will be released from the escrow account to Telent in the short to medium-term.

Commenting on this ground-breaking deal, Andrew Reid, head of corporate consulting at Watson Wyatt, said if approved the Telent deal would be the biggest transfer of pension liabilities in the UK to the secondary pensions buyout market to date, and give Pension Corporation management of pension assets in excess of £5bn.

"It is another significant step in the development of the secondary market for pension liabilities," said Reid.

"Post acquisition, it looks like the pension liabilities and assets will be separated from the operating business. Pension Corporation adopted similar principles in previous acquisitions, selling off the operating businesses fairly quickly.

"It will be interesting to see how long the pension liabilities remain within the occupational pensions regulatory regime, rather than in the insurance regulatory regime. The stringent capital adequacy requirements of an insured arrangement do not apply in the pensions regime. Amongst other things, in effect this gives greater flexibility in the assets backing the liabilities, which might allow Pension Corporation to feel more comfortable effectively offering a lower price for the pension liabilities."

Merrill Lynch is acting as exclusive financial adviser and corporate broker to CILP and Pension Corporation, while Lazard is acting as adviser to Telent.

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