Micro Focus could raise equity to address high leverage, potential COVID-19 impact – sources

15 May 2020 - 12:00 am UTC

Micro Focus, the British enterprise software group, could tap investors for fresh equity to address its high leverage and the potential impact of coronavirus on its balance sheet, according to several sources familiar with the matter.
The FTSE 250 constituent could look to place some 20% of its issued share capital by way of an accelerated bookbuild (ABB) in an attempt to provide a short-term solution to its high gearing, two of the sources said. A non-pre-emptive 20% placement could raise approximately GBP 250m for Micro Focus, pricing in a rough 10%  discount, based on the group’s current market cap of GBP 1.33bn, a third source added.
While the group had USD 600m (GBP 493m) of cash-on-hand as of 29 February and a USD 500m (GBP 410.8m) revolving credit facility (RCF), in its full year results – announced in February – management guidance on revenue and costs pointed to an EBITDA decline in the region of 18% prior to disruption caused by the coronavirus pandemic.
The company reported a net debt/adjusted EBITDA ratio of 3.2x based on revenues of USD 3.3bn (GBP 2.7bn) for the TTM to October 2019. Micro Focus management, however, has a mid-term net debt/EBITDA target of 2.7x, according to its annual report, while access to more than 35% of the RCF is contingent on leverage remaining lower than 3.85x.
Micro Focus said on March 18 there had been no material impact on its business to date, but that “the ultimate impact on the global economy is unknown”.
Take-private talk
High debt is also a factor reducing the prospect of a near term take-private, sources said. In late April, Micro Focus saw its shares gain almost 35% over a one week period after press reports said prospective buyers were holding discussions with the company about a possible take-private bid.
Goldman Sachs had put pencils down on the company’s strategic review in late 2019, a fourth and fifth source familiar with the situation said. Micro Focus, however, had more recently looked to re-engage with parties whose interest in the businesses remained, the fourth and first sources said. Discussions fell apart due to the difficulty of raising finance to support a leveraged buyout, the first source said.
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by Ryan Gould, Amy-Jo Crowley and Charlie Taylor-Kroll in London and Jonathan Guilford and Bhavna Kaul in New York, with analytics by William Cain