Some investors last week were calling for a price increase on the $450 million credit for Accellent, but at press time Friday the deal was reportedly selling at its LIBOR plus 2 1/4% level. The JPMorgan and Credit Suisse First Boston deal, which hit the market last week, backs the leveraged buyout of the company by Kohlberg Kravis Roberts & Co. from a private investment group led by KRG Capital Partners and DLJ Merchant Banking Partners. Potential investors said they consider Accellent to be a good company, but they all pointed to one number the seven times leverage tacked on.
"It has a huge purchase multiple and huge total leverage seven times," said one investor. "It is an inadequate spread at 225 given that huge leverage; I think they have to get it up to get it done." Another investor speculated this deal might have some trouble based on the leverage and the bond deal in a tighter bond market. Other investors said they took a look but had to pass because of the leverage.
But even with those dissenters, the book was filling up, one source said. One investor who was calling for a price increase said he still thought it was a good deal and a good company. "It's one of those where you would say you couldn't do it, but some things make it a good deal," he said. "Standard & Poor's gave it a one recovery rating; there is a lot of sub debt assuming the sub debt gets done; there is a strong recurring revenue stream; management has experience operating in a levered environment and they are putting some of their own money in. But the trade off is: leverage, leverage, leverage."
The financing consists of a $375 million term loan "B" and a $75 million revolver. The deal also includes $325 million senior subordinated notes. The acquisition is expected to be completed before the end of the year. Based in Wilmington, Mass., Accellent provides integrated contract manufacturing and design services to the medical device industry. As part of the transaction, members of management and KKR will invest about $640 million of equity, according to Moody's Investors Service.
Moody's assigned a B2 to the term loan and revolver and a Caa1 to the notes. In its report the agency writes that the ratings reflect the very high leverage and a small revenue base as well as some regulatory risk. However these factors are mitigated by the fact it is a leading contract manufacturing business which focuses on markets that have good underlying growth as well as improved profitability associated with the integration of MedSource Technologies. Accellent bought MedSource in June 2004 for about $220 million.
CSFB and Hogan & Hartson advised Accellent and JPMorgan and Simpson Thacher & Bartlett advised KKR. Spokeswomen for KKR and KRG declined comment. A spokesman for JPMorgan also declined comment. Calls to Accellent officials were not returned, nor were calls to a CSFB banker or a DLJ spokesman.
