DEALTALK-Intelsat to test investors' love for leverage

April 10 Wed Apr 10, 2013 6:59am EDT

April 10 (Reuters) - Intelsat Global Holdings S.A. plans to test investors' tolerance for financial leverage in a proposed $500 million IPO next week, as the satellite operator tries to take advantage of a stock market rebound that has increased the appetite for new offerings.

Luxembourg-based Intelsat, which is owned by European private equity firm BC Partners and Menlo Park, California-based Silverlake Partners, carries a debt load of more than $15.9 billion, giving it a leverage multiple of around 7.8 times.

That compares to an average debt to EBITDA multiple of 4 to 5 times for other recent sponsor-backed IPOs like Norwegian Cruise Line Holdings Ltd and Bright Horizons Family Solutions Inc

"It's a sign of the times in the marketplace that you're seeing deals like this come," said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Inc. "People in general are being more receptive to deals with risk, but they need to understand that it's not all about reward, they need to be cautious."

The company's debt level is slightly higher than it was after its $16.6 billion buyout in 2008, which ranks as the largest takeover of a PE-owned company by another private equity firm, according to Thomson Reuters data. Intelsat carried $15.3 billion in debt after the deal closed.

The company's hefty debt load has resulted in high interest expense which, in turn, caused a string of net losses.

Over the last three years, Intelsat has racked up combined net losses of $1.1 billion, according to a company prospectus. Last year, it devoted $1.3 billion, or about half its revenue, to pay down its interest expense.

Intelsat's growth prospects may also be of concern to investors. Intelsat's revenue rose just 3 percent to $2.6 billion in 2012, and the portion of those revenues that come from new business has fallen since 2009.

"The limit here is definitely being tested," said Dave Stepherson, senior portfolio manager at Hardesty Capital Management in Baltimore. "The cash flow is strong until the economy goes south and the company has no flexibility to meet its debt obligations. To me, the level of debt is bordering on insanity."

The company will use the IPO to pay down debt and is also planning a $700 million mandatory convertible bond deal concurrent with its IPO.

PUSHED TOO FAR?

Intelsat is trying to come to market at a time when a slew of sponsor-backed companies taken private during the buyout boom of 2006 to 2007 are also looking to list.

In March, packaged foods maker Pinnacle Foods, backed by Blackstone Group LP, raised $580 million in its IPO.

Other private equity-backed companies that have gone public this year include child care operator Bright Horizons Family Solutions Inc, backed by Bain Capital; cruise line operator Norwegian Cruise Line Holdings Ltd, backed by Apollo Global Management LLC and TPG; and communications technology company West Corp, backed by Thomas H. Lee Partners and Quadrangle Group.

"You're seeing some of these more mature companies with less apparent growth that couldn't have gone out a year ago begin to come to market," said Jonathan Crane, a senior managing director at Keybanc Capital Markets. "Now the market is so much stronger that companies that perhaps don't have the growth profile but do have other characteristics can get done today."

But that willingness to shoulder debt can be pushed too far.

Last month, private equity-backed communication services company West Corp had a weak opening on the Nasdaq during its public debut. West, which priced below its expected range, saw shares open at $19 which was $1 below its IPO price. Since then, shares have rallied slightly to close Tuesday at $20.75.

The market's reaction to West, which has a leverage ratio of roughly 5 times, could raise questions about the future of companies like Intelsat, which have even higher leverage.

Still, Intelsat and its backers are hoping that the company's high margins and predictability will make its heavy debt load and moderate growth rate tolerable.

The company posted EBITDA margins of roughly 77 percent last year and its backlog, or expected future revenue from existing customers, stood at $10.7 billion. This enables Intelsat to have visibility into nearly 80 percent of its revenue each year.

The company is selling 21.7 million shares at a range of $21 to $25 per share. It would be valued at $2.4 billion at the midpoint of its range.

The IPO's lead underwriters include Goldman Sachs Group Inc , JP Morgan Chase & Co, Morgan Stanley and Bank of America Merrill Lynch.

Intelsat could not be reached for comment.

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