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.

Just as one big tech company's buyout efforts appear to be faltering, along comes another potential megadeal candidate with a better shot at success.   

BMC Software Inc., which has been owned by Bain Capital and Golden Gate Capital since 2013, is considering combining with rival CA Inc. in a transaction that would take the latter private, Bloomberg News reported late Tuesday. The news sparked a rally in CA shares that drove the company's market value up to $15 billion, which means a buyout would be the biggest since Dell Inc.'s management-led takeover in 2013. 

The deal has a much more realistic chance of occurring than a leveraged buyout of Citrix Systems Inc., the $12 billion cloud-computing company whose discussions with private equity firms over a take-private deal have reportedly become bogged down. That's because BMC is essentially a strategic buyer that can afford to pay up because of the potential synergies it can extract. If that sounds familiar, it's because it's the same dynamic that facilitated the most recent (and only) megabuyout since Dell: Apollo Global Management's $12.3 billion acquisition of ADT Corp., which was combined with Protection 1, another home-security company owned by the New York firm.

Ending the Megabuyout Drought?
Few leveraged buyouts over $10 billion have occurred since the financial crisis
Source: Bloomberg
*The transaction value represents the equity value excluding Michael Dell's stake less net debt and differs from the often-reported figure of ~$24 billion

So how would the math work? Even including an average 25 percent deal premium, CA isn't expensive at around 11.1 times its projected fiscal 2018 Ebitda or 4 times its revenue: 

Middle of the Pack
A CA buyout at an average deal premium would value the company at roughly 4 times its forward sales, which is in line with recent software LBO multiples
Source: Bloomberg
*Average multiple of the displayed deals is 4.3x

Bain and Golden Gate will likely have to come up with a chunk of equity, but that can be minimized if CA's largest shareholders -- Martin Haefner and Careal Holding AG, the holding company of Haefner and his sister -- commit to rolling all or part of their collective 25 percent stake in the company. Apart from that, a $20 billion debt package may be required.

Reward for Risk
Appetite for debt backing a CA-BMC merger will likely be high, as yields remain attractive. For Bain and Golden Gate, borrowing costs likely won't be too different to their BMC deal
Source: LCD, an offering of S&P Global Market Intelligence

CA's enterprise value, including a deal premium, is already roughly $16.5 billion and BMC itself already has more than $6 billion of outstanding debt, according to data compiled by Bloomberg. That would result in a leverage ratio of almost 9 times the combined company's Ebitda, which is high, but not uncommon for software companies.  Solera and Tibco Software, which were each taken private by Vista Equity Partners, had post-transaction leverage of 8 and 11 respectively, according to Moody's. These companies had no problem attracting yield-hungry investors to their debt when it came time to borrow owing to their recurring cash flow, and a combined BMC-CA shouldn't either. 

Reliable
Lenders to the combined CA and BMC will want assurance its free cash flow can service what will likely be a significant debt load
Source: Bloomberg

There is one potential sticking point to a deal: Jefferies analysts have flagged potential antitrust issues in the mainframe market, which they describe as an oligopoly controlled by CA, BMC and IBM. Still, it's a good time to test the leveraged-finance market, where banks are likely willing to chase lucrative lending deals now that President Donald Trump's Treasury Department is poised to ease the regulatory burden.

Where some banks may have previously passed on a deal like BMC-CA at the risk of getting called out for doing it (as happened with Goldman Sachs Group Inc. and its financing of the Ultimate Fighting Championship buyout last year), the indication that regulators may not be as strict about imposing current guidelines will probably make them feel they have the leeway.

No doubt, this megadeal will test the buyout market. Assuming a transaction can get done, and there's a good chance it will, it'll prove that size is no longer a roadblock.

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

  1. The Haefners inherited their stake from their father Walter Haefner who obtained it in 1986 when CA acquired University Computing.

  2. This assumes 2 percent annual Ebitda growth for BMC, whose financials haven't been available since its buyout. For context, CA and IBM have seen Ebitda slowly decline over time, but BMC's CEO has said publicly that the company's Ebitda is improving (this is likely due to operating improvements and cost savings imposed by its private equity 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