Splitting SunGard, sponsors clear path toward exit: UPDATE

SunGard announced on Jan. 24 that it planned to spin off its disaster recovery business, which will retain the name SunGard Availability Services. Both SunGard and SunGard Availability Services will continue to be owned principally by the consortium of private equity investment funds that took the Wayne, Pennsylvania-based financial technology provider private in August 2005. The tax-free transaction could occur as early as the end of the first quarter.

When SunGard went private in an $11.4 billion buyout, it was the largest privatization of a technology company ever and the second-largest leveraged buyout at the time. Silver Lake organized the group of buyers, whose other members are Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co LP, Providence Equity Partners and TPG Capital. Neither Silver Lake nor SunGard responded by deadline to Buyouts’s requests for comment on whether the spinoff might be intended to pave the way for the sale or IPO of one or both of the businesses. [UPDATE: A spokesperson for Silver Lake later declined to comment.]

The company now is planning to amend $4.24 billion in loans to back the spinoff, sources told sister service Thomson Reuters Loan Pricing Corp. The company is amending its $850 million revolver due March 2018 and $3.387 billion in term loan B tranches maturing in various years from 2014 to 2020. Among other provisions, the amendment would allow SunGard Availability Services to incur up to $1.5 billion of debt in connection with the split. [UPDATE: The amendment also would allow SunGard to effect the split-off without requiring an initial public offering. It also would allow SunGard’s secured net leverage to increase no more than 0.60x of adjusted EBITDA at the time of the split-off.]

Ratings agencies shrugged off the move, saying the spinoff would have no immediate impact on SunGard’s credit ratings. Moody’s Investors Service said it expects that total adjusted debt-to-EBITDA will be over 6.5x upon close for the remaining SunGard company. Moody’s has a B2 corporate family rating on SunGard, which means its debt is considered speculative and subject to high credit risk.

Moody’s also offered insights on the diverging prospects of the SunGard businesses. Its financial services operation, the core of the surviving SunGard, has a “strong business profile” with “low customer concentration, diverse product and service line offerings, and broad geographic reach,” Moody’s said. In addition, SunGard’s products and services, including processing systems for various kinds of financial companies, should benefit from regulatory reforms. By contrast, Moody’s characterized the availability services business as “more capital intensive and declining.”

The company’s latest quarterly report provides additional detail on how financial services and availability services are moving in opposite directions. Financial services, the company’s largest segment, generated $635 million of revenue in the quarter ended Sept. 30, while availability services accounted for about a third, $340 million, of a total $1 billion revenue tally in the period. (SunGard’s relatively small public sector and education unit, which will remain with the financial services company, accounted for the remaining $53 million of revenue.)

More telling is the profitability trend of the segments. Quarterly financial services revenue dropped 1 percent from the same period last year, and availability dropped 2 percent, but adjusted EBITDA rose 14 percent in financial services to $194 million, while it fell 11 percent for availability services, to $108 million.

As a point of comparison, in 2005, the year it went private, financial services provided $1.9 billion of SunGard’s revenue, availability $1.3 billion, and public sector and education $788 million. But the availability services business has changed enormously. No longer do trucks carry spools of data tapes to backup facilities for storage; instead, banks and other companies back data up in real time, either mirroring transactions to remote, but in-house, locations or backing up their data to the cloud. SunGard has introduced its own managed service for disaster recovery, but it has not reversed the decline of availability services.

SunGard has been considering a spin-off of availability services for at least two years. But after dropping a spinoff plan in 2012, the company set a $720 million dividend recap, in which it paid its first dividend since the buyout.

(Updates to add that Silver Lake declined to comment and to add details of the loan amendment.)