Bad Idea – Ancestry.com Owners Aim to Extract $900 Million Payout With Loan – Yahoo! Finance

This is a bad idea –Ancestry.com Owners Aim to Extract $900 Million Payout With Loan: https://finance.yahoo.com/news/ancestry-com-owners-aim-extract-160436335.html.

Having taken enough accounting courses for my undergraduate and graduate degrees, a high debt level is a great way to kill a company even one as potentially profitable as Ancestry.com.

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.

 

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.

I don’t know the interest rate of the debt they want to repay compared to the debt they want to borrow to repay it. Unless the older debt has a higher interest rate to make it worth borrowing more money to pay it off, this could be a bad deal.

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.

There’s come a time when a company can create such a debt load it can’t sustain it.

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.

Not factored into the above is the fact that many users are having ongoing problems accessing Ancestry. From what I have seen, the number of users having access problems is getting worse, not better. It’s a shame that most of the major genealogy bloggers and experts are not raising the issue with Ancestry. The ones I follow tend to downplay or discount the problems. This can backfire on them in the future if Ancestry does nothing to address the issues. It looks like Ancestry has a “too big to fail” mentality as do many of the genealogy experts and bloggers who aren’t sounding the alarm.

As an outsider, Ancestry appears to have the attitude that many paying customers will keep paying no matter what. Seen enough companies with that unwise philosophy find themselves shutting down. Ancestry needs to realize this is a market that is not a have-to market. Unlike food and other have-to items – rent, utilities, etc., a paid Ancestry subscription is a luxury and non-essential item.

About ICT Genealogist

Originally from Gulfport, Mississippi. Live in Wichita, Kansas now. I suffer Bipolar I, ultra-ultra rapid cycling, mixed episodes. Blog on a variety of topics - genealogy, DNA, mental health, among others. Let's collaborateDealspotr.com
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