Written By The market sell-off in February 2021 has been particularly tough on many sectors, including tech stocks. But for some investors, the Citrix debt overhang presented a unique opportunity to profit from the chaos. Citrix Systems Inc., a software company that specializes in virtualization, networking and cloud computing technology, has seen its share price tumble 33% since the start of 2021. The share price decline has been driven by investor uncertainty around the company’s leveraged buyout (LBO) debt overhang, which stands at $7.6 billion. In this blog post, we’ll take a look at how Citrix’s LBO debt overhang is attracting investors despite the sell-off in the broader markets. We’ll also examine why now may be an opportune time for investors to consider adding Citrix to their portfolios.
What is an LBO?
An LBO is a type of financing in which a company borrows money from investors to buy out another company. The borrowed money is used to pay for the purchase price of the target company, and the remaining amount is used to pay back the investors.
LBOs are usually done by private equity firms, who then own the target company. The goal of an LBO is usually to increase the value of the target company so that it can be sold at a profit.
There are some risks associated with LBOs. For example, if the target company cannot be sold for a profit, the investors may not get their money back. Additionally, if the target company does not perform well after the purchase, it may negatively impact the value of the private equity firm’s portfolio.
Despite these risks, LBOs can be attractive to investors because they can provide high returns if everything goes according to plan.
What is Citrix?
Citrix is a publicly traded software company that provides virtualization, networking and cloud computing products to businesses of all sizes. The company was founded in 1989 and is headquartered in Fort Lauderdale, Florida. Citrix has a market capitalization of over $12 billion and trades on the Nasdaq Stock Market under the ticker symbol CTXS.
The company’s products are used by businesses to improve efficiency and reduce costs by allowing employees to work from anywhere and access applications and data from any device. Citrix’s flagship product is XenServer, a server virtualization platform that enables businesses to consolidate physical servers and reduce their datacenter footprint. Other popular products include XenDesktop, XenMobile and NetScaler.
In recent years, Citrix has been transitioning from a traditional software company to a cloud services provider. The company offers a number of cloud-based products and services, including XenApp, XenMobile Cloud and ShareFile. Citrix also has a strategic partnership with Amazon Web Services (AWS) to provide customers with hybrid cloud solutions that combine on-premise infrastructure with the AWS public cloud.
Despite its strong product portfolio, Citrix has been facing challenges in recent years as its core business comes under pressure from the likes of Microsoft, VMware and Cisco Systems. In response to this competitive threat, Citrix has been investing heavily in its cloud business which now accounts for around 20% of its total revenue. While this shift has helped to offset some of the
Why is there an LBO Debt Overhang?
In 2007, Citrix Systems, Inc. (Nasdaq: CTXS) was taken private in a $8.2 billion leveraged buyout (LBO) by Silver Lake Partners and Microsoft Corporation (Nasdaq: MSFT). The deal was financed with $5.4 billion of debt and $2.8 billion of equity from the buyers.
The vast majority of the debt from the LBO has been paid down over the years, but there is still approximately $1.1 billion outstanding as of September 30, 2020. The remaining debt is referred to as an “LBO debt overhang.”
While an LBO debt overhang can be a negative for a company, in Citrix’s case it has actually attracted investors despite the recent market sell-off. The reason is that bondholders believe they will be repaid in full when the company is sold or goes public again.
Citrix is currently in the process of being acquired by Vector Capital for $2.25 billion. The deal is expected to close in the first quarter of 2021 and will result in Citrix becoming a privately held company once again. Bondholders are expect to be repaid in full when the deal closes.
Who are the investors?
Citrix (CTXS) has been in the news recently for its $2.25 billion leveraged buyout (LBO) of software company, AppSense. The deal was financed by a consortium of investors led by Silver Lake Partners, with participation from GIC, an investment arm of the Government of Singapore.
The deal, which was announced on August 2nd, 2016, is still subject to regulatory approval and is expected to close in the fourth quarter of 2016.
Despite the current market sell-off, Citrix’s LBO debt overhang has attracted a number of investors. Below we take a look at some of the reasons why investors are interested in this deal.
1) The LBO will be accretive to earnings: The AppSense acquisition will be immediately accretive to Citrix’s earnings per share (EPS). According to Silver Lake’s estimates, the transaction is expected to generate cost synergies of approximately $75 million within two years after closing.
2) The valuation is attractive: At the time of announcement, AppSense had an enterprise value (EV) / last twelve months (LTM) EBITDA multiple of 8.4x. This compares favorably to Citrix’s own EV / LTM EBITDA multiple of 11.6x and the median multiple for software companies in the S&P 500 index of 16.5x.
3) The debt financing is manageable: Cit
How much money is involved?
In a leveraged buyout (LBO), a company is acquired using a significant amount of borrowed money, resulting in a high level of debt. The borrowing is typically done through the use of bonds, which are then paid back with the future cash flow of the newly acquired company.
The amount of money involved in an LBO can vary greatly, depending on the size and scope of the deal. In general, larger companies will require more borrowing than smaller companies. For example, in 2012, private equity firm Kohlberg Kravis Roberts & Co. (KKR) completed an LBO of pet food manufacturer Del Monte Foods for $5.3 billion. The deal was financed with $3.6 billion in debt and $1.7 billion in equity from KKR and other investors.
In contrast, KKR’s 2006 LBO of Toys “R” Us was valued at $6.6 billion and was financed with $5 billion in debt and $1.6 billion in equity from KKR and other investors. Thus, while the overall value of the two deals was similar, the Toys “R” Us deal involved significantly more borrowing than the Del Monte Foods deal.
The amount of debt used to finance an LBO can have important implications for the company’s financial health and credit rating. In general, companies with higher levels of debt are considered to be more risky investments, as they may have difficulty making interest payments or repaying their loans if
What are the consequences of the LBO?
The consequences of the LBO are severe. The company will be saddled with a large amount of debt, and the interest payments on that debt will eat into the company’s cash flow. This will make it difficult for the company to invest in new products and services, and to compete against its rivals. In addition, the LBO will put pressure on the company’s share price, as investors worry about the company’s ability to service its debt.
Conclusion
The Citrix LBO debt overhang has attracted investors despite the market sell-off and turbulent times. The attractive nature of debt financing allows leveraged buyouts to continue paying dividends and interest payments even in a downturn, providing stability for shareholders and making them more appealing than other investments. This is particularly true with Citrix, which has seen its share price rise since 2020 while many stocks have been hit hard by economic uncertainty. As long as this trend continues, it looks like Citrix will remain an attractive option for investors who are looking for reliable returns amidst ongoing market volatility.
