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A mobile phone shows a Skype application at the 3GSM World congress in Barcelona, on February 14, 2011. The 2011 Mobile World Congress will be held from 15 to 18 February in Barcelona. (JOSEP LAGO/AFP/Getty Images)
A mobile phone shows a Skype application at the 3GSM World congress in Barcelona, on February 14, 2011. The 2011 Mobile World Congress will be held from 15 to 18 February in Barcelona. (JOSEP LAGO/AFP/Getty Images)

Streetwise

CPPIB scoops windfall as Microsoft buys Skype for $8.5-billion Add to ...

Microsoft Corp.'s announcement that it has struck a deal for Skype Technologies worth $8.5-billion (U.S.) (including debt) is undoubtedly putting smiles on the faces of CPPIB's investment professionals this morning.



Canada Pension Plan Investment Board was part of an investor group that bought a 65-per-cent stake in Skype from eBay for about $1.9-billion in cash in late 2009, a deal that valued Skype at $2.75-billion. EBay held onto the remaining 35 per cent interest.

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The investor group had been led by Silver Lake, a global private equity firm that specializes in technology. Other members, besides CPPIB, were Index Ventures and Andreessen Horowitz. J.P.



CPPIB's original investment as part of that deal was $300-million, but the breakdown of ownership stakes between the investors has changed slightly since the deal closed.



Morgan, Barclays and RBC Dominion Securities had both advised the investor group and provided financing for the deal.



The deal for Skype was one of the top five private market transactions globally in 2009. During that year, CPPIB also participated in two more of the five: the $5.2-billion purchase of IMS Health with Texas Pacific Group and the $2.1-billion deal for Macquarie Communications Group.

When the news broke in September 2009 that CPPIB was putting $300-million into a buyout of Skype, it was at first a bit of a headscratcher.

This was a pension fund that tended more to the stolid end of private equity investing. Waterworks, power grids, airports, toll roads -- those were the CPPIB's stock in trade. But a big stake in a new technology company? It seemed out of place in the CPPIB private investment portfolio, but the fund's position at the time was it was a wise place to take some risk, and that the rewards would be appropriate.

They have been. With Microsoft acquiring Skype for $8.5-billion, it appears CPPIB is going to make about three times its original investment on behalf of Canadian pensioners.

CPPIB originally took a 15-per-cent stake with its $300-million contribution. That stake has been diluted somewhat since the transaction was announced, but judging by the numbers in last year's filing for a Skype initial public offering, still remains about 13 per cent. (The offering, obviously, never happened). That puts the value of CPPIB's take in a sale at about $1.1-billion. There is some debt that will have to be repaid, so we'll have to wait for the official announcement to see what return CPPIB is officially getting, but it's going to be juicy.

At the moment Skype is mainly used on desktop computers, but there has been a lot of speculation surrounding its potential in the lucrative mobile market -- surely something that lured Microsoft.

On mobile phones, Skype charges a low long distance fee, and wireless providers transmit the call through their data systems that customers pay extra for each month. The service is easy-to-use because Skype has developed a mobile app that mimics its desktop experience.



When filing for an IPO, Skype also contemplated expanding into corporate services, seeking to dominate things like the conference call market. At the time it needed cash to invest in this area. Money from Microsoft will easily provide whatever is needed. Moreover, Microsoft's credible brand name could help Skype find some traction in this arena.

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