Siris pays 30x EBITDA for Digital River, Cinven sees ‘hiccup’ in European cov-lite loans

Talking Deal Prices with Steve Gelsi

Based on the disclosed deal value of Digital River Inc of $840 million, Siris Capital paid 29.6x the company’s EBITDA of $28.4 million, based on annualizing its most recent quarterly EBITDA of $7.1 million for the three months ended Sept 30. Siris Capital said it would pay $26 a share, a 50 percent premium over Digital River’s public market valuation.

While 30x EBITDA it may seem like a high multiple, it’s not clear how much equity Siris Capital will actually lay out for the transaction since financing details weren’t available on the deal, which is due to close early next year. Siris Capital said in an October statement that it lined up an investor group for equity financing, while debt financing would be provided by Macquarie Capital and Sankaty Advisors.

As a pioneer in helping clients like Microsoft and others sell stuff over the Internet, Digital River traces its roots as a public company back to the dot-com craze. But it had run into a series of money-losing quarters. In 2011, the stock dove to around $15 from around $30.

In early 2013, David Dobson, a former executive at CA Technologies, took over as CEO after company founder Joel Ronning retired. Under Dobson, who was also CEO of Corel Corp, the company has closed data centers, cut its work force and divested businesses. Analysts have forecasted a possible turnaround for the company, which grew its EBITDA by 15 percent and swung to a profit in the third quarter.

Daniel Moloney, executive partner at Siris Capital, said in a prepared statement that Digital River had “significant global growth potential.” He cited the company’s leadership in “commerce-as-a-service,” a phrase that evokes the hot software-as-service (SaaS) market that’s commanded big purchase price multiples by private equity firms.

European cov-lite loan pricing moves past ‘hiccup’

While cov-lite loans continue to gain traction in European buyouts, the volatility in capital markets a few weeks ago caused some “hiccups,” in the leveraged loan market, said Matthew Sabben-Clare, a partner at London-based Cinven.

“Leveraged loans have been somewhat more insulated in terms of volatility than other asset classes, but at times like this you tend to see some borrowers stepping back from the market,” he said.

In terms of pricing, when markets are strong, borrowers in cov-lite loans may pay 25 to 50 basis points more in interest than loans that include financial maintenance covenants. If demand for cov-lite loans continues to strengthen, the difference may be narrower.

The cov-lite loan market in Europe is growing, Sabben-Clare said. “It went into an extended drought during and after the financial crisis, but in the last 18 to 24 months it’s been much stronger,” he said.

In Europe, cov-lite institutional lenders tend to focus on larger companies in a few well-liked sectors that will provide enough liquidity for loan syndication. Deals from the technology, media and telecommunications sector, as well as health care, with good revenue visibility remain in favor for cov-lite loans, Sabben-Clare said. Cinven portfolio companies with cov-lite structures include CPA Global, CeramTec, Medpace and Ufinet.