TPG is offering $1.5 bln for Australian funeral-services firm InvoCare. A 41% premium means the buyer would be piling on debt as interest rates rise. Making a decent return would require some deft footwork, says AntonyMCurrie
for the 10th time in as many months on Tuesday and more expected, the cost to service that debt is going up. At 5%, for example, annual interest payments on the new debt would be almost $50 million – a third of InvoCare’s expected EBITDA next year. That would eat away at the earnings needed to reinvest in the business to arrest its recent decline.
Moreover, such high gearing would also make cashing out at a premium harder. Assuming InvoCare’s revenue continues to grow at a 6% annual pace and no debt is paid down, generating a 20% internal rate of return after five years would require more than doubling this year’s expected EBITDA to A$320 million, using Propel’s current multiple of EBITDA to enterprise value, Breakingviews calculates.
The private equity firm had the previous day bought an almost 18% stake in the company from a variety of investors at A$12.65 a share. It owns the majority in stock, with some 7% bought via a swap deal with UBS. It was the same offer as its ensuing bid for the rest of the company and represents a 41% premium to the closing price on March 6.Opinions expressed are those of the author.
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