The owners of Ancestry.com Inc., the DNA analysis and family tree company, are turning to a well-tested private equity play for taking cash out of a company: topping up on debt.
An investor group led by Singapore’s sovereign wealth fund GIC and private equity firm Silver Lake Management LLC is looking to pull out more than $900 million from the company through a special dividend mostly funded by new borrowings. They are also seeking approval for another one-time distribution before year-end.
The dividend would be one of the largest funded by the issuance of junk debt this year. In May, Hellman & Friedman LLC and Carlyle Group LP sold a risky type of bond to take a payout of as much as $1.1 billion from Pharmaceutical Product Development LLC. In April Sycamore Partners LLC extracted a $1 billion dividend from Staples Inc.
Ancestry.com is a darling of private equity thanks to its robust cash flow and dominant position in the fast-growing market for DNA testing and family history research. As earnings kept growing, its owners methodically piled more and more debt on the company to juice their returns.
In all, Ancestry.com has made about $1.1 billion of distributions to equity holders since a Permira Advisers LLP-led group took the company private in 2012, according to credit rating reports and data compiled by Bloomberg.
As the credit cycle ages and competition in the industry intensifies, some analysts and investors have turned more cautious toward the latest payout.
“The dividend is a clear step-up in the aggressiveness of the company’s financial policy,” Harold Steiner, an analyst at Moody’s Investors Service, wrote in a note last week. “Recent declines in DNA kit sales and subscribers have made future prospects more uncertain, making this an inopportune time to raise leverage aggressively.”
Both Moody’s and S&P Global Ratings lowered their outlook on the company in response to the latest dividend plans and a slowdown in revenue growth.
S&P said it will be difficult for the company to continue to grow revenues from its core subscription service at the same pace it did in the past, because of limitations on the size of the market and high churn.
Ancestry.com plans to issue a new $1.15 billion seven-year term loan, and use nearly $400 million of cash to fund the recapitalization. This money will be used to make a distribution of around $910 million to shareholders, and repay $600 million of debt. The company’s owners are seeking creditor consent to pay an additional one-time dividend of around $150 million at the end of the year, according to Moody’s. After that, the company has agreed to use excess cash flow to pay down debt.
Silver Lake and GIC acquired a majority stake in Ancestry.com in 2016 in a deal valuing the company at $2.6 billion. Prior owners — including management, Permira and Spectrum Equity — have a minority interest in the business.
If successful, the deal will increase Ancestry’s total debt load to around 5.5 times a measure of earnings, compared to 4.2 times currently based on the company’s projections, according to people familiar with the matter who asked not to be named because the details are not public. Moody’s and S&P, which use more conservative criteria for those calculations, put the ratio at 7 times or higher.
Representatives for Morgan Stanley, the lead arranger of the new term loan, and Silver Lake declined to comment. GIC didn’t respond to a request for comment, and a representative for Ancestry.com said that as a privately held company it doesn’t comment on its capital structure.