Carlyle purchased the industrial fastening and packaging
firm Signode from ITW in 1H14. The purchase price was 9X EBITDA. They
contributed $885 mln in equity representing around 25% of the transaction. The
leverage multiple was 4.5X FLD (loans) and 6.5X total with a B/B2 rating. So
how did it workout for Carlyle?
There are four levers PE can use to create value:
1)
Buy Right (i.e. cheap): this is increasingly
difficult in the competitive domestic PE market. Here, Carlyle appeared to pay
about market as it was competing against other PE firms for Signode. Signode
was attractive given its established customer base and low cyclicality.
Result-neutral.
2)
Financial Engineering (i.e. leverage): Carlyle
capitalized on aggressive debt market conditions to obtain a relatively full
leverage level with loose loan terms (i.e. covenant lite). Carlyle’s reputation
and large dollar amount of equity contribution probably helped creditors get
comfortable with financing. The large leverage level illustrates that PE firms
really do not care about risk adjusted returns. All that counts for them is
nominal returns, which of course are amplified by leverage. Result-positive.
3)
Improved Operations: an initial move was to
improve working capital efficiency by increasing accounts payable to 60+ days,
which freed up millions. Remember free cash flow= EBIT X (1-t) + D&A-
(CAPEX + Working Capital Increases). Additional efficiency improvements and
cost cuts were also planned. These were possible as Signode was no longer a
division of ITW, but now a motivated highly indebted LBO. Result-positive.
4)
Sell High (i.e. multiple expansion): Carlyle
signaled that they planned a liquidity event in 2016/2017. So far they are
benefiting from an increase in PPX from the 9X paid last year to the current
10.5X. This combined with improved operations should provide multiple exit
opportunities including a trade sale, dividend recap or IPO. Of course Carlyle
cannot control market developments, but they can capitalize on them. Things can
change before their planned value monetarization, but right now things look
promising. Result-positive.
Bottom line, the transaction looks very promising despite
Carlyle having paid a then full price.
Most of the gains come from an old fashion carry trade (borrow and pay interest to acquire an asset with a higher cash yield) which appears to have worked out. Investors
could have replicated the results by employing similar leverage to acquire
stock in a comparable firm that would have also benefited from a rising stock
market. Market timing is everything as other deals, richly priced at the wrong
point of the cycle, like TXU and Caesars, have experienced trouble.
J
Simply put, private banking is all about offering custom-designed banking services to wealthy clients. Although servicing corporate clients has always been the core business area for banks, more and more banks are now also paying more attention to managing the assets of wealthy individuals.guarantor loans
ReplyDelete