Monotype Nabs $1.45 Billion Debt Package for Owner Payout

Options

Comments

  • Thomas Phinney
    Thomas Phinney Posts: 2,808
    Options
    This scale of debt-financed payout to the owner of the company is not ideal for the long-term financial health of said company.
  • Grzegorz Luk (gluk)
    Options
    the strategy is still the same, the method of gutting has changed.
  • Ray Larabie
    Ray Larabie Posts: 1,402
    edited March 18
    Options
    I think it can end up making Monotype more attractive for sale. If Monotype were a sinking ship, saddling it with this debt would make it unappealing. But if they've demonstrated good operational performance, it's appealing for buyers because the loan is portable. In other words, the buyer doesn't have to secure their own loan. I think it also demonstrates to potential buyers that there's value to be extracted from Monotype, either through its cash flow, assets, or market position.

    HGGC typically holds on for three to seven years, and we've already at year five. 
    Whether this is good news depends on the next buyer.
  • JoyceKetterer
    JoyceKetterer Posts: 794
    Options
    I've thought for a while that monotype was trying to sell again.  But the fact they haven't either means I'm wrong or they can't.
  • John Hudson
    John Hudson Posts: 3,060
    Options
    If Monotype were a sinking ship, saddling it with this debt would make it unappealing. But if they've demonstrated good operational performance, it's appealing for buyers because the loan is portable. In other words, the buyer doesn't have to secure their own loan.
    According to the article, most of the loan is going to refinancing existing debt, and the rest is going to paying the current owners a dividend, i.e. is being extracted from the company leaving only increased debt. The $150 million line of credit might be attractive to someone, but most of the new debt is not available as operating or investment capital.

    But this amused me: ‘Font Designer Monotype’.
  • Thomas Phinney
    Thomas Phinney Posts: 2,808
    Options
    Although it is about half refinancing, the owners are taking out $600 million as a dividend, which appears to approximately double the company’s previous debt to $1.2 billion, if I read the details correctly. Even if one takes the $1.45 B as the full amount, they just added over 70% to Monotype’s non-trivial debt load.

    I don’t think they would have done this if they believed they could sell it soon. I think this happened because they were not selling it in a hurry, in today’s less-frenzied markets.
  • John Hudson
    John Hudson Posts: 3,060
    Options
    HGGC purchased Monotype for $825 million, so the dividend recoups 73% of their initial investment. At this point virtually any reasonable sale price would constitute a significant profit for them. But the floated asking price late last year was more than $4 billion, and I wonder if anyone thinks that HGGC has added that much value to Monotype in the past five years.
  • JoyceKetterer
    JoyceKetterer Posts: 794
    Options
    @Thomas Phinney what I don't understand is why the buying spreed?  Is it just that the prices for the assets are nothing to them?  i thought vulture capitalists usually sell bits rather than buying bits.


    @John Hudson i can't decide if I shuld laugh or cry over the ‘Font Designer Monotype’ thing
  • Grzegorz Luk (gluk)
    Options
    In my opinion, HGGC strategy of buying out most of the market and finding a buyer for the monopoly company failed. Now they minimize their losses. This is a bad future for Monotype.

  • Thomas Phinney
    Thomas Phinney Posts: 2,808
    Options
    @JoyceKetterer
    On the one hand, Monotype was in a strong market share position as far as owning fonts, and the private equity owners may have thought buying up more mid-size libraries makes them look even more dominant in this regard. But then again, this was also just a continuation of Monotype’s pre-existing strategy (before PE), so arguably unless they were specifically told NOT to, it might have been the default.
  • JoyceKetterer
    JoyceKetterer Posts: 794
    Options
    @Thomas Phinney I hadn't crunched the numbers myself so I hadn't realised that the majority of their earnings is probably going to debt service.  I'd assume earnings have gone up some since 2019, but not radically enough to change the percentages (especially given interest rates have also gone up).

    I never thought the point of the acquisition was to flip it based on increase in value. That said, i didn't think anyone would want to buy it and take it private before they did so I am often wrong about this stuff.  

    They didn't buy it at a bargain, and there's not much they literally can do in their usual window to increase the value.  I always assumed they were going to tidy it up a bit and then take it public again.  This move seems to preclude that?  So now I think maybe they are going to run it into the ground, extracting value along the way with the usual nefarious methods, and then take a loss on what's left?  i really hope not because in that case what happens to the IP?
  • Thierry Blancpain
    Options
    They didn't buy it at a bargain
    I’m far from an expert in these things, but if their EBITDA was $200M in 2019, a purchase price of $825M is definitely not a high price. That’s an EBITDA multiple of 4.125. That’s rather low, especially for a purchase in the frothy times of 2019. I assume this must reflect the parts of MT’s business that were total flops, like their 2016 acquisition of Olapic for around 145mm.

    I believe a multiple of 10 or so or above would be considered on the high end for a software firm. For Saas businesses, much higher multiples were sometimes applied in those crazy times. While MT is not a Saas, they’re clearly trying to shift to recurring revenue with their subscriptions and especially making large clients pay yearly costs. It’s much more profitable and the markets like the more reliable income streams over one-time purchases.
  • Nadine Chahine
    Options
    One good question is whether one thinks these acquisitions and other changes in the market increased the value of the company by about 5x to $4B+, compared to less than five years ago.
    The purpose of the acquisitions is to promote growth. A public software company needs to report high growth every quarter and I would expect a private one would need to show strong growth in order for it to sell. Growth can come via the added revenues of the purchased foundries/typefaces.

    Monotype has tried many times to grow outside of its font business and it flopped every single time. So they finally learned the lesson and now they pursue growth by gobbling up the type industry. 

    To go back to Thomas's question, Monotype's value has likely gone up because of increased revenue (from direct sales as well as acquisitions). One hears this from many different sources, MT is very aggressively pursuing IP infringements and we know that they raised their prices by 10 times (new annual model on MyFonts) so it makes sense that the revenue has grown dramatically.
  • JoyceKetterer
    JoyceKetterer Posts: 794
    Options
    @Thierry Blancpain I think you can make an argument they paid a fair price, which you've done admirably, but I don't think you can argue they got it at a discount? I personally think they over paid, but that's not a position I can defend with logic.
  • Thomas Phinney
    Thomas Phinney Posts: 2,808
    Options
    @Nadine Chahine

    If the company is doing so well financially, why didn’t the PE folks sell it? That is the usual best way of getting return. Loading up the debt is typically part of looting the company. It does not _necessarily_ lead to a death spiral, but it is definitely not good for Monotype’s health.

    A public software company needs to report high growth every quarter

    They would like to, but that doesn’t necessarily happen. In the decade before they were bought out (2009 to 2018), their annual growth ranged from -15% to 22%, averaging 9%. Those are good numbers, but not spectacular.

    But somehow the company went from 9% annual growth rate while publicly traded to having their value go up by 43% per year (compounded) for 4.5 years while privately held. That’s not impossible, but I most certainly would want to see some clear evidence for the new valuation, which so far only exists as a claim by the private equity ownership.

    Monotype's value has likely gone up because of increased revenue (from direct sales as well as acquisitions)

    Their acquisition pattern has been ~ consistent this whole time, so I don’t think you can assume that the more recent acquisitions have funded any higher growth rate than previously. I would say that a substantial portion of their growth has been acquisition-based for a very long time (perhaps 25 years or so, given their acquisitions of ITC in 2000 and Linotype in 2006).

    Raising prices doesn’t necessarily increase revenue, and rarely proportionately; it depends on price elasticity. Also, in this case, the same vendor’s non-subscription licensing options are an alternative, so… it’s complicated.

    > and I would expect a private one would need to show strong growth in order for it to sell

    And they didn’t sell it.
  • Nadine Chahine
    Options

    Their acquisition pattern has been ~ consistent this whole time, so I don’t think you can assume that the more recent acquisitions have funded any higher growth rate than previously. I would say that a substantial portion of their growth has been acquisition-based for a very long time (perhaps 25 years or so, given their acquisitions of ITC in 2000 and Linotype in 2006).

    Raising prices doesn’t necessarily increase revenue, and rarely proportionately; it depends on price elasticity. Also, in this case, the same vendor’s non-subscription licensing options are an alternative, so… it’s complicated.
    They had a series of spectacular failures in acquisitions that negatively affected EBTDA. This would include Swift and Olapic, particularly the latter.

    For pricing, what I've heard from clients is that the amounts they are charging for IP infringement are way way higher than before. So there's been a big shift in pricing strategy and a very aggressive approach to the market.