G8 Education has increased its bid for Affinity Education (Affinity) from $0.70 to $0.80 per share and is now also offering Affinity shareholders the option to take the offer in cash. G8 has also advised it has raised SGD$155m (~AUD$155) in one year unsecured notes paying a fixed rate of 3.5% to support the cash offer
The new SDG unsecured notes rank alongside the existing AUD fixed and floating bonds and have a maturity date of 31 July 2016 and were raised at an effective credit margin of circa 230bps over 1 year swap. The notes can be redeemed at the company’s option from 30 November 2015 whole or in part.
Further the company has also announced a AUD$50m senior secured debt facility to payout Affinity’s current banking facilities if the bid is successful.
The change from a scrip only offer (swapping investors’ Affinity shares for G8’s) to a scrip or cash offer is credit negative given debt has been drawn to support the offer. While the proportion of scrip and cash take up is unknown, the group has already raised SGD$155m to fund the offer if needed. Given G8 already owns ~20% of Affinity, the maximum cash expense would be around $150m at the revised offer price.
The revised acquisition offer price equates to enterprise value ($185m equity + $21m net debt) multiple of 6.43 – 7.63x EBITDA based upon Affinity’s earnings guidance of $27-32m underlying for FY15.
Assuming the new debt of $155m and the takeover is successful G8’s net debt to EBITDA ratio will increase from approximately 1.4x to 2.1x based upon forecast FY15 figures.
As previously noted it is likely that G8 will use an increasing proportion of debt to fund acquisitions to keep delivering shareholder growth. If debt levels increase without sufficient growth in earnings, this will weaken the credit profile of G8 as demonstrated above. The company may also potentially pay higher acquisition multiples than historically with the offer for Affinity a good example. At current levels G8 bonds look fair value.
Please see the article below “G8 Education makes a hostile takeover bid for rival Affinity Education” for more information.