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If you are a Canadian pensioner, IMS Healthcare has been very good to you. If you are a potential investor in the health-care information company's planned initial public offering, it may not be so fruitful.
Canada Pension Plan Investment Board and some private equity partners bought IMS in 2010, one of the biggest deals since the financial bust of 2008. The purchase price was $5.2-billion, funded with a big chunk of debt.
IMS just filed its offering documents with U.S. regulators. They don't say how big the IPO will be, but Renaissance Capital estimates it will be $750-million to $1-billion.
There is also no breakdown of what will go to selling shareholders and what will go to the company, which will presumably use its share to pay down significant debt.
Whatever the selling shareholders get will be gravy. Most or all of the buyers' original investment has already been returned, as since then, they have pulled out $2-billion of dividends (CPPIB owns about 26 per cent, so that's about $500-million).
There is no doubt that the new owners have increased the value of the company on an operating level. The sponsors' management has put some solid trends in place. Revenue has grown at a 5.6-per-cent compound annual rate since the buyout, while adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 10.7 per cent as margins have improved.
The one issue investors may have is the company doesn't make any money on a bottom-line basis, and really hasn't for most of the time that the new owners have had it. The culprit is debt. The company had $3-billion of debt at the end of 2011. As of Sept. 30, that number was $5-billion. The company has funded those dividends to its owners by borrowing.
There is also substantial amortization of the value of the company's client relationships and databases, a non-cash charge to be sure, but one that reflects the fact that IMS must spend money to keep those databases up.
So what management calls "non-operating earnings," better known as net income, don't really exist. In the first nine months of 2013, IMS reported no net income on revenue of $1.87-billion. Last year by this time it had $11-million on $1.8-billion.
Net income won't exist without a reasonable amount of debt disappearing to free up cash that is now going to interest.
That said, timing is on the sellers' side. Investors' mindset has shifted from a show-me-the-net-income market to a market enamoured of anything to do with technology.