It has been a quick run for private equity owners, including Black Knight, CC Capital, Cannae Holdings and Thomas H. Lee Partners, after they took Dun & Bradstreet (DNB) private late in 2018.
Less than two years since the announcement of that deal, the company has now been taken public again, enjoying a solid bump on their opening day as Dun & Bradstreet has maintained its stock symbol. Unfortunately, the current valuation is a lot higher than it was when the company was previously public just one and a half years ago, probably the reason why private equity owners have timed this offering at this point in time.
The Deal, The Company
The acquisition of Dun & Bradstreet, which was announced late in 2018, actually closed early in 2019, February of that year to be more precise. That deal took place at $145 per share. Yet, more interesting is the enterprise value, with the company valued at $6.9 billion at the time, comprising of a $5.4 billion equity valuation and $1.5 billion in net debt assumption.
As this deal is so fresh, the 2018 numbers are of course still reported in the S1 filing, revealing revenues of $1.72 billion that year on which the company reported operating earnings of $429 million and adjusted EBITDA of $569 million.
As the company is used by many financial professionals and only had gone private quite recently, most users will probably be familiar to some degree with the company. For those who are not, Dun & Bradstreet is a global provider of business decision data and analytics with a mission to enable trust for clients in decision-making.
Other applications include visibility, compliance with laws, and sales force productivity, as the size and coverage of the company is immense. The company has information on more than 360 million businesses, as the company provides this data to some 135,000 global customers.
The company generates about 60% of sales from its finance and risk business, comprised of finance, procurement and compliance services. Sales and marketing makes up the remainder of 40% of sales, comprised of namesake functions.
IPO & Valuation Thoughts
Dun & Bradstreet initially aimed to sell 65.75 million shares at a price range between $19 and $21 per share, in an effort to generate $1.31 billion in gross proceeds. Not only was the issue price hiked to $22 per share, the company increased the issue to 78.3 million shares as well, boosting gross proceeds to $1.72 billion.
In traditional fashion, the company saddled the business with a lot of debt. The $1.5 billion net debt load ahead of the takeover in 2018/2019 now stands at nearly $3.6 billion ahead of the public offering, or about $2.0 billion after we incorporate the net proceeds of the offering.
Based on a share count of approximately 412 million shares trading at $22, the valuation has increased a great deal. The equity valuation of the firm now stands at $9.0 billion, or $11.0 billion if we account for the net debt load, far greater than the $6.9 billion valuation at the time of the acquisition in early 2019.
While the 2018 numbers revealed $1.72 billion in sales and $569 million in adjusted EBITDA, the pro-forma numbers for 2019 are far less impressive, with reported sales down to $1.60 billion and adjusted EBITDA down to $552 million. This decline stems from the impact of deferred revenue balances hurting sales by $155 million. Adjusted for that, sales would be up 2% to $1.76 billion as EBITDA otherwise would top $700 million.
So, let’s first start with leverage as a $2 billion net debt load and $700 million adjusted EBITDA number works down to a leverage ratio close to 3 times, which is high but given the predictability and solid growth of the business, not necessarily a big issue.
The next step is to turn the EBITDA number into a profit number. As the business is not very capital intensive, the D&A part only works down to about $50 million as a run rate, for a $650 million EBIT number. Interest on the $2.0 billion net debt should be taken care of at $100 million or less, as a 20% tax rate on remaining earnings results in net earnings of $440 million. If that correction stands, earnings could come in around $1.05-$1.10 per share. Trading at $22, the valuation looked reasonable at 20 times, although the leverage position is full already while sales are growing at low single digits.
Of course, this is all before the opening day jump and gains seen in the first day of trading, with shares now exchanging hands at $27 per share, pushing up the multiple to about 25 times, as the $11 billion equity valuation has jumped to around $13 billion. This is essentially twice the valuation when the business was acquired in essence just over 15 months ago, although the entire industry trades at premium levels, including Moody’s (MCO).
Must be said that momentum has been accelerating a little with first-quarter sales up 9%. Yet, more impressive was that adjusted EBITDA margins have seen improvements here as well, putting the company on track to report higher earnings this year unless COVID-19 has a big impact, which is still somewhat uncertain of course at this point in time.
I must say that I like investing within the information services industry as continued increase in regulation and thirst for information means that the sector at large has not just seen solid growth but also the growth trajectory has typically been very steady.
Leverage is, of course, a risk given the debt load, yet this seems manageable. In my view, the biggest risks is that of quite a demanding valuation (although actually not so high in relation to peers). The biggest risk in my eyes is that I do not believe that the company is among the strongest within the industry, as the recent move to become aggressive in cost-cutting might actually impact morale or hurt the innovative power of the business.
At this point in time, I think that the current valuation is quite full and I do not see the immediate risk-reward, certainly not as the current private equity owners are taking the company public so soon after they acquired the firm.
For now, I am keeping a close eye on the organic growth and margin numbers for the coming quarters, although I recognize that Dun & Bradstreet typically did not trade at a big premium when it was public in the years before.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.