In January, US investment management firms Vista Equity Partners and Elliott Investment Management agreed to take Citrix Systems (CTX) via a leveraged buyout (LBO). However, current market conditions have delayed the transaction as the cost of debt increases. I am neutral on the title.
The deal is valued at approximately $16.5 billion, including debt, and shareholders will receive $104 in cash per share. As a result, Citrix stock has shown marginal changes in price action since then. Indeed, CTXS has hovered around a range of $100 to $101 per share since the announcement of the acquisition.
Difficult credit market conditions could impact LBO success
Credit conditions have become particularly difficult for the banks, potentially hampering their ability to make a profit by supporting the transaction. The cost of money has increased since the Federal Reserve started raising interest rates. Additionally, growing recession fears are weighing on banks that act as intermediaries in offering the bond to the investment community. Therefore, it could affect the success of the LBO.
The deal was expected to be completed between late June and early July 2022, but is taking longer than expected as banks seek more efficient ways to secure the LBO in difficult credit market conditions. Indeed, it is likely that significant changes will have to be made to the initial financing plan in order to attract more investors.
Interest from private credit funds has fallen as the amount of money investors are willing to commit to the deal has shrunk. Additionally, some are only interested in providing financing if it is at a significant discount to face value.
During this time, the portion of the debt provided by the banks will likely take the form of an “A term loan“, meaning that the debt will be repaid evenly (including the principal amount) throughout the term loan. ‘amortization.
Combined entity expected to achieve $500 million in additional EBITDA
If the deal goes through, the acquisition will see Citrix be combined with another company called Tibco, which is owned by Vista Equity Partners. Citrix alone generates $1.1 billion in EBITDA while Tibco’s EBITDA is $500 million. Nonetheless, the combined entity is expected to generate $2.1 billion in EBITDA due to cost savings.
That’s good news because when it comes to Citrix’s financial strength, there are some aspects of its balance sheet that could be cause for concern. Although Citrix’s total assets of $6.9 billion exceed total liabilities of $6.2 billion, the Altman Z-Score of 2.79 points to a gray area. This means that the company is in fact in some kind of financial crisis and, although low, there is a risk of bankruptcy which could materialize in a few years.
Being able to generate an additional $500 million in EBITDA from cost savings alone will help improve the overall risk profile of the combined entity. This is especially useful because the leveraged buyout will accumulate a lot of additional debt on the company’s balance sheet. However, with an interest coverage ratio of 5.18, the company should be able to easily absorb the interest cost of the additional debt.
Investor Considerations Before Acquisition Financing
There are some things investors will need to consider before lending to the company – high inflation and rising interest rates. Inflation, which the Federal Reserve wants to slow by raising interest rates, is likely to stay above the 2% target even after the Fed Funds rate moves above neutral. Indeed, the rapid rise in the prices of goods and services seems well anchored.
As a result, the yield on debt should provide a return justifying the risk of asset devaluation due to high inflation. Bonds and other fixed income securities are particularly vulnerable to inflation.
As for rising rates, the continued aggressiveness of the Federal Reserve will gradually increase borrowing costs going forward. With this in mind, the investor must judge the competitiveness of the rate of return on this debt and compare it to other forms of investment available.
Conclusion – The limited upside does not justify the risk
Through a leveraged buyout, two US investment firms plan to acquire Citrix Systems, Inc. and take it off the stock market. However, the closing may be delayed due to the difficult credit conditions necessary to support the LBO. In the worst case, the deal may fail if there is not enough interest from investors to fund the deal. Therefore, the upside potential does not justify the risk.