TEXT - S&P rates Ancestry.com
Overview -- U.S. online media company Ancestry.com is proposing to issue a new $720 million senior secured credit facility and $300 million senior unsecured notes to fund a leveraged buyout. -- We are assigning the company our 'B' preliminary corporate credit rating. The outlook is stable. We are also assigning the senior secured credit facility a 'B+' preliminary issue-level rating with a preliminary recovery rating of '2', and assigning the unsecured notes a 'CCC+' preliminary issue-level rating with a preliminary recovery rating of '6'. -- The stable outlook reflects our expectation that leverage will steadily decline, and the company will continue to generate meaningful discretionary cash flow, and maintain adequate liquidity. Rating Action On Dec. 3, 2012, Standard & Poor's Ratings Services assigned Provo, Utah-based online family history resources provider Ancestry.com its 'B' preliminary corporate credit rating. The outlook is stable. At the same time, we assigned Ancestry.com's proposed $720 million senior secured credit facilities our preliminary issue-level rating of 'B+' (one notch higher than our 'B' corporate credit rating on the company), with a preliminary recovery rating of '2', indicating our expectation for substantial (70% to 90%) recovery for lenders in the event of a payment default. The facility consists of a $50 million revolving credit facility due 2017 and a $670 million term loan due 2019. We also assigned Ancestry.com's proposed $300 million senior unsecured notes due 2020 our preliminary issue-level rating of 'CCC+' (two notches lower than our 'B' corporate credit rating on the company), with a preliminary recovery rating of '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. Ancestry.com plans to use the aggregate debt proceeds, along with $686 million of equity, including new equity contributed by Permira Advisers and rollover equity from Spectrum Equity and management, to finance the $1.6 billion acquisition. Rationale The 'B' preliminary rating reflects the company's aggressive financial profile and narrow business focus. We view the company's business risk as "weak" as its reliance on one website for the majority of revenue and EBITDA and need to replenish its customer base offset its leading market position and solid EBITDA margin. Pro forma for the transaction, leased-adjusted leverage is 6.3x and EBITDA coverage of interest is 2.4x. In our view, the company's financial risk profile is "highly leveraged." We view Ancestry.com's management and governance to be "fair." Ancestry.com is the global leader in the commercial market for online family history research. The company's main website, Ancestry.com, has over 2 million subscribers and accounts for 90% of revenue. Subscribers pay around $19 per month on average to research their genealogy and build a family tree. Ancestry.com has digitized and indexed billions of records making it easier for users to discover new information. The company also generates revenue from other websites such as Archives.com, which serves more value-oriented consumers; AncestryDNA, a DNA testing service; and Family Tree Maker desktop software. Ancestry.com generates about three quarters of its revenue in the U.S., 12% from the U.K., and the rest from Australia, Canada, and Sweden. The company has recently acquired content from Ireland and Germany. Additional content provides an incentive for current subscribers to continue using the service and could also provide the foundation for a local service to be launched in new countries. We believe that launches in new countries are likely, but not immediately on the horizon as it takes time to acquire and process enough content to start a service. We view the company's collection of records as providing a meaningful barrier to entry. The company's monthly subscriber churn has historically ranged from 3.3% to 4.8%. During the 12 months ended Sept. 30, 2012, churn was 3.7%. We view customer relationship management, and churn specifically, as a significant risk to manage, given the highly discretionary nature of the service and the customer time commitment involved. Marketing and advertising is the company's largest operating expense. The average subscriber acquisition cost has climbed over the past few years and we believe could continue to grow, despite a decline in SAC during the third quarter of 2012. Ancestry.com exhibited strong growth through recent periods of economic weakness, however, in our opinion maintaining its high growth could be difficult. The company benefitted from the NBC series "Who Do You Think You Are?," which aired for three seasons but was canceled in the spring of 2012. The company estimates that this show led to 100,000 gross subscriber additions per year (about 8% of total 2011 gross subscriber additions). Under our base-case scenario for 2013, we expect revenue to grow at a high-single-digit percentage rate with subscriber growth of 8% to 10% and essentially flat average revenue per user. EBITDA, as a result, should grow 10% or more based on slower growth in personnel costs. We expect that churn will increase slightly and that subscriber acquisition costs will continue to grow. By the end of 2013, lease-adjusted leverage should fall to the mid- to low-5x range (compared with 6.3x pro forma for the LBO) and interest coverage should rise to the high-2x area (compared with 2.4x pro forma). In the third quarter of 2012, revenue grew 24.5% and EBITDA grew 28%. Subscription revenues grew 21% as the number of subscribers increased 19% while average revenue per user in the quarter was flat compared with the period a year earlier. Product and other revenue grew 88% due to additional revenue from the Ancestry DNA product, launched in the second quarter of this year. For the 12 months ended Sept. 30, 2012, the EBITDA margin was 30.8%, consistent with level of the year-earlier period. Working capital has been a source of cash as customers pay upfront for subscriptions. During the 12 months ended Sept. 30, 2012, Ancestry.com spent roughly 13% of EBITDA on capital expenditures and a slightly higher proportion on content acquisition, which mainly consists of the cost of digitizing and indexing historical records. During the same period, the company converted 75% of EBITDA to discretionary cash flow. In 2013, we expect conversion of EBITDA to discretionary cash flow to fall to about 30% due to increased interest expense as a result of the leveraged buyout. Liquidity We believe that Ancestry.com has "adequate" liquidity to cover its needs over the next 12 to 18 months. Our view of the company's liquidity profile incorporates the following assumptions and factors: -- We expect sources of liquidity over the next 12 months to exceed uses by over 1.2x. -- We would expect net sources to remain positive, even if EBITDA were to decline by 15%. -- Ancestry.com is likely to maintain covenant compliance, even with a 15% decrease in EBITDA. -- In our view, Ancestry.com can absorb low-probability, high-impact adversities. Pro forma for the transaction, sources of liquidity will include $25 million cash, an undrawn $50 million revolver, and an expected $60 million of discretionary cash flow in 2013. Uses include an expected $45 million of spending on capital expenditures and content acquisition. There are no significant maturities over the next five years. Amortization on the term loan is 1% per year and there is a 50% mandatory excess cash flow sweep with leverage based step-downs. Ancestry.com will have a net secured leverage covenant that only applies when more than $15 million is drawn on the revolving credit facility. We expect the company will have a sufficient margin of compliance over the intermediate term. Recovery analysis For the complete recovery analysis, please see our recovery report on Ancestry.com, to be published on RatingsDirect following this release. Outlook The stable outlook reflects our expectation that leverage will steadily decline, and that the company will continue to generate meaningful discretionary cash flow and maintain adequate liquidity. We could raise the rating over the intermediate term if the company is able to lower leverage to less than 5x while maintaining its EBITDA margin and continuing to grow revenue. This could occur if EBITDA grows by 20% during 2013 and debt falls by $15 million. Although less likely over the intermediate term, we could lower the rating if leverage rises above 7x or discretionary cash flow falls significantly. This would likely be the result of deterioration in operating performance including an increase in churn and higher subscriber acquisition costs. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List New Rating Ancestry.com Inc. Corporate Credit Rating BB (prelim)/Stable/-- Senior Secured $50M revolving credit facility due 2017 B+ (prelim) Recovery Rating 2 (prelim) $670M term loan due 2019 B+ (prelim) Recovery Rating 2 (prelim) Senior Unsecured $300M notes due 2020 CCC+ (prelim) Recovery Rating 6 (prelim)
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