Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It may not seem like it, but Apollo Global Management is staying true to its word. 

The firm's leveraged buyout of ADT Corp., announced Tuesday, comes just two weeks after this comment from its co-founder Josh Harris during Apollo's fourth-quarter earnings call:

"Although the financing markets have all but seized up lately for more traditional buyouts, volatile times like these play to the strengths of Apollo's flexible investment model and integrated platform, enabling us to pivot towards stressed and distressed opportunities as they begin to emerge."

While another pending Apollo target, Apollo Education Group, fits the mold of a "stressed opportunity" (as discussed here), the ADT deal at first blush seems to be more of the traditional variety that Harris says are increasingly difficult to finance. But if you take a closer look, there are reasons why it's not.

For one, Apollo is essentially a strategic buyer, because it owns a rival business and home-security company, Protection 1, which will benefit from synergies created from the ADT merger.

Fair Price
Apollo's premium is in line with ADT's 24-month high and above the average analyst price target.
Source: Bloomberg

And although financing has been fully committed, it's worth pointing out that although banks stepped up to provide at least $4.7 billion in leveraged loans (which will eventually be offloaded onto investors), a $750 million hole is being plugged by selling preferred securities to an investment affiliate of Koch Industries. That's an expensive alternative to loans, and signals that sizable leveraged buyouts relying solely on bank debt may be a rare sight until markets stabilize. 

Still, it shows there's no reason private equity firms must sit on their hands during times of market volatility, letting so-called dry powder, or capital raised from investors, keep rising to new highs. Many own companies that can make plays for either closely held competitors or publicly traded rivals whose stocks may have been weighed down by the global selloff.

Piling Up
The biggest private-equity firms have an abundance of capital to spend.
Source: SEC filings
*Excludes dry powder for credit, real estate, hedge funds and other strategies.

Unless a competing bid arrives within the upcoming 40-day "go-shop" period, Apollo will have snapped up ADT for roughly 6.6 times its estimated 2016 earnings before interest, taxes, depreciation and amortization, a bargain compared to most deals of its kind over the past five years according to data compiled by Bloomberg. The only larger, less expensive buyout in the past five years was the take-private of Dell by Michael Dell's MSD Capital and Silver Lake in 2013, which valued the PC maker at around 5.1 times Ebitda

Inexpensive
Apollo's deal for ADT is one of the cheaper take private deals in recent years.
Source: Bloomberg
*Represents trailing Ebitda as forward Ebitda figures not available

The playbook from here is fairly simple: Apollo can swoop up additional competitors (it already bought smaller rival ASG Security at the same time it purchased Protection 1) and within around five years, barring any tumult in the underlying performance of the businesses and assuming the capital markets are welcoming, it can give public investors another shot at owning the company through an initial public offering, and sell the stock over time. 

Apollo's willingness to strike could rub off on its peers. With the exception of Carlyle Group , most haven't written a big check in a while and Blackstone's president Tony James admitted last month that the firm can obtain financing for "plain vanilla solid businesses." If that's the case, if not now, then when? 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Carlyle has agreed to buy Veritas, a unit of Symantec, although the deal was renegotiated

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net