Details of the complex transaction remain sketchy. But according to Moody’s Investors Service, the company would simultaneously borrow $655 million as part of proposed bank credit facilities. Along with $38 million of cash on hand, the company would use $630 million in proceeds from the debt offering to “fund a dividend to existing shareholders, refinance $115 million of outstanding debt, and pay related fees and expenses,” Moody’s said.
The $208 million that Huntsman Gay Global would invest for its 51 percent stake values the Tucson, Ariz.-based company at 10.3x EBITDA, according to Moody’s. At the same time, Moody’s reports that the leverage multiple following the transaction would be 6.8x EBITDA. According to a Buyouts analysis, these figures would suggest an enterprise value of $1.2 billion for Sunquest, annual EBITDA of $116.5 million, and outstanding debt following the transaction of $792 million.
The company plans to raise $655 million of proposed bank credit in connection with the dividend recap and sale to Huntsman Gay Global, according to Moody’s. The facility is comprised of a $25 million senior first lien secured revolving credit facility due 2015; a $385 million senior first lien secured term loan facility due 2017; and a $245 million senior second lien secured term loan facility due in 2018.
The deal would mark the latest drop in a downpour of dividend recaps this year, as liquidity-starved firms turn to robust debt markets to generate liquidity after a stagnant few years following the economic downturn. On Dec. 1, the same day Moody’s released the news about Sunquest,
Sunquest would be the latest investment from Huntsman Gay Global, the Palo Alto-based firm that began buying companies in the fall of 2008 when most buyout shops were retreating from new investments. The size of the equity check suggests the firm’s fund may be nearing the end of its investment life. Including Sunquest, the firm will have bought at least seven companies and made three growth investments with its first fund, according to its Web site. Huntsman Gay Global’s staff includes former San Francisco 49ers quarterback and NFL hall-of-famer Steve Young, who is a managing director.
It’s unclear why Vista Equity would want to relinquish control of such a veritable cash machine in Sunquest. The San Francisco-based shop bought the company with its third fund, a $1.3 billion fund from 2007.
After reviewing the transaction, Moody’s downgraded Sunquest’s corporate family rating to B2 from B1 and affirmed its B2 probability of default rating because of the developments. The ratings agency also assigned a Ba3 rating to a new first lien credit facility and a Caa1 rating to the new second lien facility. The ratings outlook is stable.
The downgrade reflects what Moody’s called “the significant increase in leverage” to 6.8x following the deal. Moody’s also said Sunquest’s modest operating scale and product concentration in one market, laboratory information systems, informed its decision to downgrade the company.
Sunquest’s leverage will require the company to sustain strong EBITDA margins and good revenue growth to generate enough free cash flow to reduce debt, Moody’s said. The ratings agency expects the company to prioritize deleveraging to 5.5x by the end of the company’s fiscal year 2012. Moody’s said it would consider upgrading the company if it is able to eventually sustain a debt-to-EBITDA ratio of less than 3.0x. It would downgrade Sunquest further if that ratio hovers above 5.5x by the end of fiscal 2012.
Still, Moody’s highlighted some positive aspects of Sunquest’s business, including good market position in the niche laboratory information systems market; attractive recurring maintenance revenues with high renewal rates; a stable customer base; strong EBITDA margins and good EBITDA conversion to free cash flow.