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.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Will the clouds align for Citrix Systems Inc. to break the megabuyout drought?

Bloomberg News reported on Monday that Citrix hired Goldman Sachs Group Inc. to sound out potential suitors including private equity firms. The news sent the Fort Lauderdale, Florida-based cloud-services company's stock 6.8 percent higher, though the shares gave back some of their gains on Tuesday morning.

In many ways, Citrix fits the classic mold of a private equity buyout in the technology industry. The 28-year-old company isn't known for having the most cutting edge or loved software, but it is essential plumbing for many companies that want to give employees access to their digital files while they're at home or on the road, making it a steady earner. That said, a deal would be pricey and would require some financial gymnastics to get done. 

Slow and Steady
Citrix continues to generate significant and steady streams of cash
Source: Bloomberg

An offer at a conservative premium of 20 percent over the company's closing market value Friday would give Citrix's equity a price tag of $14.9 billion. Taking debt into account, the transaction would be valued at $13.7 billion, making it the biggest buyout since Michael Dell and Silver Lake Partners teamed up to take his eponymous company private in 2013.

Anything Can Happen
Very few leveraged buyouts over $10 billion have occurred since the crisis
Source: Bloomberg

While that's a massive number, it's not impossible. In fact, a back-of-the-envelope calculation shows that a buyout could happen relatively easily if a handful of things fell into place.

First and foremost, the company needs to attract interest in itself, something it was unable to do in 2015. If would-be buyers show up, based on assumptions outlined in the below table, they'll have to come up with nearly $5 billion of equity, which could come from teams of up to three private equity firms armed with ample dry powder and aligned investment horizons. It also could come from consortiums comprising one or two firms and their sovereign-wealth or pension fund investors that have displayed an increasing willingness to participate directly in deals.

Cobbling together the required equity could be made a little easier if Citrix's resident activist Elliott Management decides to roll its 4.3 percent stake -- which would be valued at roughly $640 million based on the above calculation -- into a buyout.  

Realm of Possibility
A buyout of Citrix Systems will require a handful of moving pieces to fall into place
Source: Bloomberg Gadfly analysis
*Assumes debt equal to 7 times FY2017's estimated Ebitda. EV assumes a 20 percent premium to closing market value on Friday, March 10.

Bidding groups also would need to line up a slice of preferred equity, following the lead of firms that have tapped investors such as the affiliate of Koch Industries to plug financing gaps in buyouts including ADT Corp. and Solera Holdings Inc. Lastly, to secure the necessary debt financing, the appetite for junk-rated securities and health of the market would need to be close to current levels. It'd also certainly help if bidders could get the likes of PSP Investments Credit USA LLC, an affiliate of the Public Sector Pension Investment Board, to pre-commit to owning decent-sized slugs of the debt.

To pull it off, Citrix itself would need to ensure there are no unexpected hiccups that could erode what has been relatively stable free cash flow -- a key metric that private equity firms rely on when calculating how much leverage a buyout target can handle. Its track record so far looks good, though.

Citrix's steady annual revenue of more than $3 billion and its 29 percent free cash flow margins are proof that technology used in corporate settings can be hard to ditch once it's entrenched. That's music to the ears of private equity firms, which favor business-software companies for buyouts thanks to their dull-but-steady qualities. 

PE Loves Tech
Technology companies now account for nearly one out of every five buyout deals in the U.S.
Source: Bloomberg

A Citrix take-private isn't a sure thing, if only because financial buyers could be concerned about their ability to profit from an eventual sale, especially if valuations retreat. Regardless, it's a good test of whether the private equity market is ready, willing and able to go big. 

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

  1. Elliott's stake is 8.6 percent including swaps.

  2. Funds totaling $10.1 billion have flowed into the leveraged-loan market so far this year, according to BofA Merrill Lynch Global Research

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

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