“At Apollo, we believe that the biggest determinant of rate of return is purchase price,” the firm's co-founder and senior managing director Joshua Harris told the audience at Harvard Business School's annual Venture Capital and Private Equity Conference in March of this year.
Harris stressed the importance of “buying well and selling up with the right investment thesis”, and with the buyout firm's $1.6 billion acquisition of Outerwall, the owner of the Redbox movie rental service, it looks like Apollo is endeavoring to “buy well”.
Outerwall operates a range of self-service machines located at retail outlets across the US, Canada, Puerto Rico, the UK, and Ireland, and includes Redbox, which dispenses DVDs, Blu-rays, and games; Coinstar, a coin-to-cash machine; and ecoATM, an electronics recycling service.
Buyout firms have been grumbling that high valuations are dampening dealflow, but with the Outerwall acquisition, Apollo is paying less than the average multiple it has been paying in some of its recent transactions.
The New York-based private equity firm is paying circa 3.5 times 2016 adjusted earnings before interest, taxes, depreciation, and amortisation, which includes certain “synergies”, according to a note from Michael Pachter, an analyst at Wedbush Securities, distributed on 25 July. Pachter's calculation assumes that Outerwall can cut costs and boost 2016 adjusted EBITDA upward – from a range of between $340 million and $380 million to $450 million – and then continue to grow, the analyst said in the note.
The 3.5 times figure is below the average of 5.8 times EBITDA that Apollo has been paying for buyouts in its $18.4 billion Fund VIII, according to a Bloomberg report. PEI data shows that Apollo is currently investing from Fund VIII, which closed above its $17.5 billion target in 2013, and is about 50 percent deployed as of May, according to PEI news reports.
Prior to the deal announcement, Outerwall had been trading at a discount relative to its sector: its price-to-earnings ratio was 16.7 as of 25 July, compared with a sector median of 18, according to data from investment research firm Morningstar.
Apollo plans to acquire all outstanding shares of Outerwall common stock for $52 per share in cash, representing a 51 percent premium over the company's closing stock price on 14 March, just before Outerwall announced it was exploring “strategic and financial alternatives to maximise shareholder value”.
The Outerwall deal was announced four months after Apollo snapped up US grocery chain Fresh Market for $1.4 billion, in what was the largest private equity deal in the consumer and retail sector as of the first quarter of this year, according to a pwc report.
Outerwall's stock, listed on NASDAQ, closed on $52.19 per share, up 11 percent, or $5.28, from the previous close, giving the company a market capitalisation of $900.5 million.
The deal to buy Outerwall is expected to close sometime during this quarter, the retail company said in a statement.
Outerwall is scheduled to report its second-quarter earnings on 28 July. The company received financial advising from Morgan Stanley and legal advising from Wachtell, Lipton, Rosen & Katz and Perkins Coie.
Apollo, which manages about $173 billion in assets, received financial advice from LionTree Advisors, Bank of America Merrill Lynch (BAML), Barclays, Credit Suisse and Jefferies, and legal advice from Paul, Weiss, Rifkind, Wharton & Garrison.
BAML, Jefferies Finance, Barclays and Credit Suisse are providing financing for the transaction. No specific commitments were noted.
-Nicole Idar Lee contributed to this report.