BMC Looks Leveraged In Post-Buyout Deal After Second Look

The buyout of BMC Software Inc. (NASDAQ: BMC) sounds like a decent deal for shareholders on the surface. The problem is that the price peaks in the past have been higher, and what is left at the company feels like a very leveraged company for the private equity buyers. We took a look at the amount of debt versus raw equity here and the numbers are at least worth a closer look.

It turns out that the private equity group under Bain Capital and Golden Gate Capital is just not contributing that much in raw equity on the deal. This deal is coming from an OPM (other people’s money) debt financing. We saw in an article from last week on that the deal is going to require about $6.2 billion in new debt out of an $8.7 billion total. The equity value at the buyout is $46.25 per share, roughly about $6.9 billion.

What this may be is a situation where activist investors forced management to do a deal that leverages up this company. In all, only about $1.25 billion is for equity, which by our take is about half of traditional deals. The private equity group will also use about $1.38 billion from BMC’s balance sheet to help fund the acquisition. Our  own big fear is that the new private equity debt owners will try to refloat BMC to the public markets via an initial public offering faster than if the equity stake was larger.

If you add up the $1.25 billion in contributed equity and the $1.38 billion in cash on hand, then you are actually closer to a traditional 30% equity hurdle that we have grown to expect in equity contributions. The problem is that this is more like the equity and debt group using the house’s money to get the deal done even if that has been the case elsewhere in technology mergers from private equity.

BMC already has about $1.3 billion in long-term debt and it lists another $936 million in deferred long-term liability charges and $252 million in other liabilities on the long-term part of its books. Other assets to consider in the mix are another $131 million in short-term investments and $139 million in long-term investments. The total stockholder equity was only $818.5 million and its net tangible asset value was negative at -$1.348 billion.

Our take is that BMC management was under pressure to move the needle here. By doing so, investors likely have no real strategic buyer that could or would try to compete against the financial buyers today. BMC sounds fully valued at the buyout and we would sure expect to see this come back to the market in an IPO if the market is healthy in the next couple of years.