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.

Apollo Global Management just widened its lead as this year's most voracious private equity acquirer of public companies.

Ahead of the Pack
Apollo has outpaced its buyout rivals in 2016, with agreed-upon acquisitions of ADT, Fresh Market, Apollo Education, Diamond Resorts International -- and now, Outerwall
Source: Bloomberg

The firm said Monday it would buy Outerwall, best known as the operator of Redbox DVD kiosks, for $1.6 billion including debt. That may sound like a rich price for a business that faces steep challenges from on-demand rentals and other streaming services.

Still, Piper Jaffray analysts don't expect a "fall-off-a-cliff" scenario -- and Apollo isn't overpaying for it. In fact, it's forking out just 4.3 times Outerwall's fiscal 2016 earnings before interest, taxes, depreciation and amortization. That's lower than the average 5.8 times Ebitda that Apollo has paid for takeovers in its $18.4 billion eighth fund (a figure provided by co-founder Josh Harris at a conference in May). 

Downhill Run
Outerwall's earnings are already on the decline and set to shrink further in coming years
Source: Bloomberg

Outerwall throws off a lot of cash, which supports any debt repayments -- a coveted metric for a private equity owner. Apollo likely believes it can stem any bleeding by cutting costs and potentially selling or shuttering its ecoATM kiosk, which recycles electronic devices like cell phones. Plus, Outerwall may be able to combat some of its overall decline if Redbox's latest streaming service turns into a real competitor, or if Coinstar -- its kiosk business that counts coins and gives users cash in return for gift cards -- can successfully expand internationally. 

Debt Dash
Outerwall's bonds were trading at a significant discount ahead of the Apollo buyout, and the company was opportunistically buying them back to reduce its interest expense
Source: Bloomberg

Outerwall's shares jumped as much as 11.7 percent to $52.40, above Apollo's offer price of $52, as short-sellers covered their positions (nearly a third of the company's free float was sold short, according to data compiled by Markit). But that optimism also suggests some investors may still be clinging onto hope that other suitors -- the ones that knocked on Outerwall's door with offers as high as $90 before the stock crashed -- return. And others may believe they can able to squeeze more out of the firm -- after all, Apollo bumped its recent Apollo Education buyout by 50 cents a share after facing shareholder opposition.  

New Normal
Boards are increasingly accepting takeover offers well below a stock's 52-week high
Source: Bloomberg

Those scenarios appear unlikely, because the deal arose as a culmination of what can be assumed was a thorough auction process. A sweeter bid is also unlikely because Glenn Welling's Engaged Capital -- the company's second-largest shareholder -- began agitating in February, with a take-private transaction as its ultimate goal. Engaged -- which hasn't suffered the losses of longer-term shareholders -- is set to do well from the buyout, with an average buy-in price of around $31.32, according to a filing. That implies a roughly 66 percent paper profit if the Apollo deal is finalized in its current form. But even longer-term shareholders shouldn't put up a fuss. 

"Businesses in secular decline, like Outerwall, fit much better in a private context where variations in performance are not subject to the quarterly scrutiny of Wall Street analysts and investors," Engaged said in a February presentation. That sentiment still rings true. While they can, Outerwall shareholders should take the cash and run. 

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

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