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Interpublic outperforms on issue and could tighten further
admin | September 21, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Interpublic’s four year hiatus from the new issue market ended as they launched a four tranche, $2 billion deal to fund their acquisition of Axciom. The scarcity value in the name and improved ratings resulted in strong demand, and the debt outperformed across the curve. There remains room for potential tightening of the 10-year versus its closest peer, Omnicom. Relative value opportunities also exist within the Omnicom name to extend maturity, pick up significant spread at cheaper prices, and benefit from change of control protection.
Interpublic comes to market to fund Acxiom acquisition
IPG (Baa2/BBB (n)/BBB+) tapped the public debt market this week for $2.0 billion to fund its purchase of Acxiom Marketing Solutions (AMS), which is expected to close by year end. The last time IPG was in the market was in 2014 when it was split-rated (Baa3/BB+/BBB). The $2.0 billion dollar deal was spread across four $500 million tranches: a 2- , 3- , 10- , and 30-year. All tranches of the deal, with the exception of the 30-year, contained Special Mandatory Redemption (SMR) language that requires IPG to redeem the debt at $101 if the deal is not consummated by June 30, 2019.
The initial price talk was very attractive with the 2- and 3-year tranches pricing 30 bp tighter, while the 10-year priced 20 bp tighter and the 30-year priced 15 bp tighter. The 2- and 3-year tranches continued to perform well and are trading 15 bp tighter than where they were issued, while the 10-year has tightened roughly 8 bp. The 30-year hung closer to pricing levels on the break and has tightened about 3 bp since launch.
Exhibit 1: Pricing structure of new Interpublic debt issue
Source: Amherst Pierpont Securities
Acquisition of AMS
Upon close of the acquisition, IPG will be levered roughly 4.0x. Management is committed to both a strong balance sheet and maintaining solid investment grade ratings, with plans to delever over an 18 month period to below 3.25x. IPG will temporarily suspend share repurchases as well as moderate the dividend growth rate in order to direct free cash flow to debt reduction. Additionally, IPG put a $500 million three year term loan in place to help fund the transaction. The term loan contains a maximum leverage covenant that increases to 4.0x at the close of the transaction, then steps down to 3.75x a year post close, and 3.5x two years post close.
AMS generated $700 million of revenues last year and 2018 EBITDA is estimated to come in at $200 million, given the $2.3 billion purchase price and 11.5x EBITDA multiple it represented. On a pro forma basis, we estimate that IPG’s EBITDA margin will be closer to 17%, versus the 14.2% margin on a last twelve month (LTM) basis ended 6/30/18. Furthermore, the addition of AMS will help IPG develop data-led strategy and analytics offerings. The deal is expected to be accretive on an adjusted EPS basis in the first year after the close.
Relative Value
When the IPG deal was announced, estimated fair value was roughly 15 bp – 20 bp behind its closest peer Omnicom Group (OMC – Baa1/BBB+). OMC is nearly double the size of IPG from a revenue perspective, with a LTM EBITDA margin of 15.4% and leverage of 2.3x. Currently the relationship between OMC 3.6% 4/15/26 and IPG 4.65% 10/1/28 is approximately a 23 bp g-spread, leaving IPG room to tighten a few bp to OMC. We note that in 5yr CDS, the relationship is roughly 12 bps.
Separately, we recommend swaps out of OMC 3.625% 5/1/22 and OMC 3.65% 11/1/24 into OMC 3.6% 4/15/26. Both swaps provide for a pick in g-spread while taking out points, and the OMC 3.6% 4/15/26 is the only bond in the capital structure which contains change of control language. A swap out of the OMC 3.625% 5/1/22 bonds provides a pick of 45 bp g-spread while taking out over $4 in price. The swap out of the OMC 3.65% 11/1/24 bonds provides a pick of 16 bp g-spread and a take out of $2 in price.
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