Apollo Makes Rare Move in Latest Deal After Outbidding Buffett

For the better part of a decade, private equity firms layered increasing amounts of leverage onto buyouts in a bid to amp up their returns. Tech Data Corp. appears to be one of the exceptions.

Apollo Global Management Inc.’s $6 billion take-private of the distributor of technology products only saddled the company with debt worth 2.5 times a key measure of its earnings, according to the private equity firm. Credit rating companies have said thin profit margins limit the leverage the business can support, especially in a crisis.

The financing, agreed before the coronavirus pandemic, was structured in an unusual way for a buyout. It relied on loans backed by Tech Data’s receivables and inventory, which include iPhones, Cisco servers, printers and scanners stored in any of its 11 logistics centers around the world.

Those asset-based loans, which are often used by retailers, are considered some of the safest for banks to underwrite, as they give creditors a direct claim on the company’s property as opposed to its future cash flow. The debt also gives Tech Data more financial flexibility, and is better suited to the company’s working capital needs.

But it’s unlikely to become a new blueprint for the industry.

“I don’t think this is going to be replicated by a lot of other sponsors, because it limits the amount of leverage you can put on a business,” Matt Nord, who co-leads the private equity business at Apollo, said in an interview.

Credit rating firms, which are typically more conservative in their calculations, estimate Tech Data’s leverage will be higher. Moody’s Investors Service said it expects the ratio to increase to the high 4 times range over the next couple of quarters because of the global recession.

“Maintaining very good liquidity is critical given adjusted operating margins of less than 2% and the need to manage working capital swings throughout the year,” Moody’s analyst Carl Salas wrote in a note this month.

Still, Tech Data’s leverage is lower than what is typical on the most aggressive deals, which would be closer to 6 times or higher.

Private equity firms have been able to load more debt onto buyouts in recent years, reveling in ultra-low interest rates. That’s come back to haunt some companies that are struggling to make it through Covid-19, while some banks have scaled back underwriting risk.

“When you have a lot of debt, you just have less margin for error,” said Nord. “Over the last 5 or 10 years the economy has muddled along, and we didn’t really have these big shocks - until we did.”

Apollo said it turned down more aggressive financing packages from some of its banks for the deal.

“A number of financial institutions pitched us a traditional bank and bond financing structure which was sub-optimal for our investment thesis,” Robert Kalsow-Ramos, a partner at Apollo said in the interview.

Apollo contributed $3.75 billion of equity and sold about $2 billion of asset-based loans to institutional investors and banks earlier this month to finance the deal.

The acquisition of Tech Data closed Tuesday after a nearly five-year long pursuit for Apollo, and ultimately ended with the private equity firm paying $145-per-share -- beating Warren Buffett in an auction process. When Apollo first began to meet with Tech Data, the firm was worth less than $60 a share.

Apollo plans to invest $750 million of Tech Data’s cash flow over the next five years to expand its cloud platform, business analytics and security.

©2020 Bloomberg L.P.

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