August 9, 2018 / 6:52 PM / 2 months ago

Breakingviews - Tesla gets a lesson in buyout realities

NEW YORK (Reuters Breakingviews) - Tesla is getting a lesson in buyout realities. Elon Musk’s stated desire to take the money-losing carmaker private has set Wall Street all atwitter. But Dun & Bradstreet’s $5.4 billion leveraged buyout, announced on Thursday, is a reminder of what it usually takes: a mature, mediocre, profitable firm. That’s a better bet than capital-draining dreams of domination.

A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange shortly after the market opening in New York on July 11, 2013. REUTERS/Lucas Jackson

Dun & Bradstreet has been in business for more than 175 years, but has barely grown in a decade. Indeed, this stagnation was one reason the company’s former chief executive, Robert Carrigan, left earlier this year. Yet the firm’s business of tracking and analyzing corporate credit and risk remains a mainstay for clients and will for many years to come. 

This stability, and the fact the business doesn’t require a huge amount of capital, is attractive to buyers CC Capital, Cannae Holdings and funds affiliated with T.H. Lee. The company should have just under $400 million of net operating profit after tax next year, according to Thomson Reuters I/B/E/S. That’s about a 6 percent return, which isn’t particularly interesting. But throw in some cost cuts, and even minor growth, and the potential gains become more palatable, especially considering the firm’s stability means it can take a lot of leverage.

Now compare that to Tesla. The 15-year old company makes some very attractive cars, but not a profit – though Musk has been saying that’ll happen by the end of this year. Plans to expand autos, trucks, solar power and power storage will require massive investment to compete against giant multinationals with lots of production experience. And much of the firm’s value seemingly resides in the mercurial Musk, who also devotes his attention to trying to colonize space and burrowing under the earth.

Moreover, buyouts are inherently risky for even the best dealmakers. CC Capital, for example, was founded by Chinh Chu after he spent 25 highly profitable years at Blackstone. Yet one of this shop’s first purchases was a company called Constellation Healthcare Technologies. It went bust this year and regulators charged CHT’s former executives with falsifying documents to sell the company.

When it comes to buyouts, boring, reliable and trustworthy are the big draws. 

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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