KKR Won’t Wait for Go Daddy IPO to Get Payout: Corporate FinanceChristine Idzelis
Go Daddy Operating Co.’s private-equity owners aren’t waiting for a stock-market offering to cash in on their investments, choosing instead to borrow money to pay themselves a $350 million dividend while increasing the web-hosting company’s interest expenses.
Known for its Super Bowl commercials, Go Daddy took out a $1.1 billion, seven-year term loan this week that will be used to refinance less-expensive debt due in 2018 and to help finance the payout to KKR & Co., Silver Lake Management LLC and other shareholders. Go Daddy, based in Scottsdale, Arizona, is aiming to go public in the fall, a person with knowledge of the matter said last month.
“They weren’t under any pressure to refinance debt,” Raj Joshi, a New York-based analyst with Moody’s Investors Service, said in a telephone interview. “They’re taking advantage of the market to extend the maturities plus take out the dividend.”
The new borrowing, with a minimum rate of 4.75 percent replaces a 2018 loan at 4 percent, leading Moody’s to change its outlook on the B1 rated company to “negative” because of “aggressive shareholder-friendly financial policies,” according to an April 28 report. Total debt will rise 30 percent to about $1.48 billion with the new financing and cash borrowed under a revolving credit line, adding about $20 million of annual interest expense, Joshi said.
“Despite Go Daddy’s good levels of free cash flow, we expect deleveraging to occur slowly and primarily through operating cash flow growth,” Moody’s said in a credit research report dated May 1.
KKR, Silver Lake and Technology Crossover Ventures acquired Go Daddy under a $2.3 billion buyout in 2011, according to the report. The founder, Bob Parsons, and management own about 33 percent of the company’s common equity, according to the report.
“The company is taking advantage of favorable conditions in the capital markets to refinance our existing debt, and pay a one-time dividend to our shareholders,” Chief Communications Officer Karen Tillman wrote in an e-mail. She declined to comment on specifics of the financing.
Kristi Huller, a spokeswoman for KKR, Patricia Graue, a spokeswoman for Silver Lake who works for Brunswick Group, and Shifali Erasmus-Bhagat, a spokeswoman for Technology Crossover Ventures who works for Kinetic PR, all declined to comment.
The company will use $275 million of the $1.1 billion term loan and draw $75 million from its revolver to finance the dividend, Joshi said. Go Daddy also has $300 million of senior unsecured notes held by an entity controlled by Parsons, according to the Moody’s research report.
While Moody’s sees a “reasonable chance” of Go Daddy going public, the possibility isn’t factored into the ratings company’s analysis, said Joshi.
The interest rate on Go Daddy’s $1.1 billion term loan would decline 50 basis points upon an initial public offering and if net total leverage is no more than 3.25 times the company’s earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.
The company will have to pay a premium of 101 cents on the dollar to refinance the term loan in the first 12 months after initially offering investors six months of call protection, the data show.
The debt was sold to investors at 99.5 cents on the dollar and quoted today at 100.375, according to prices compiled by Bloomberg.
Go Daddy is the world’s largest domain name registrar and Web hosting provider, according its website.
“There are a lot of different parties offering similar services,” Elton Cerda, a New York-based analyst with Standard & Poor’s said in a telephone interview. “Go Daddy is by far the largest one.”
The company had about $1.13 billion in sales last year, according to Moody’s, which expects it will generate about $110 million in free cash flow over the next 12 months. Free cash is money available to reinvest in the business, reward shareholders with dividends and buybacks, or pay down debt.
While company has the largest share of the domain-name registration market, “Go Daddy is not the leader in terms of profitability,” said Joshi.
Cash Ebitda margins in the high-20 percent range at Web.com Group Inc. and mid-to-high 30 percent range at Endurance International Group Holdings Inc., which went public in October, exceed Go Daddy’s by a “wide margin” because the company’s costs are higher, according to Joshi.
“They spend a lot of cash to gain market share,” he said of Go Daddy. “The others chose to grow primarily through acquisitions,” mostly financed with debt, he said.
Go Daddy has more than 12 million customers globally and more than 57 million domains under management, according to its website.
While the company’s growth is largely driven by re-investing cash from operations, Go Daddy did raise $100 million of debt last year to help fund acquisitions of Locu Inc., Media Temple and AfterNic, according to Moody’s. The businesses aren’t producing profits for Go Daddy, Joshi said.
S&P, which rates the company at B, one level below Moody’s and five less than investment grade, revised Go Daddy’s outlook on April 29 to “stable” from “positive.” It cited the dividend payment financed from the loan deal for the change.
“We thought the company was going to de-lever through growth,” Cerda said. “We weren’t expecting that debt was going to rise.”