The $1.47 billion Sally Beauty credit partially funding a dividend of approximately $2.4 billion hit the market last Wednesday. The deal, led by Merrill Lynch, Bank of America, JPMorgan and Morgan Stanley, consists of a $400 million asset-based revolver, a $300 million "A" term loan and a $770 million term loan "B," according to a banker. Pricing is LIBOR plus 2 3/4% across all tranches.
Proceeds from the credit will be used to fund a special cash dividend of $25 per share for current Alberto-Culver shareholders, the company which is spinning off its Sally/BSG distribution business. In April 2005, Alberto-Culver authorized Goldman Sachs to consider strategic alternatives for the possible separation of Sally, because Sally's largest vendors had historically been competitors of ACV, according to an Oct. 13 filing with the Securities and Exchange Commission. In June 2005 the company began toying with the idea of combining Sally with Regis, an operator of salons, hair restoration centers and beauty schools.
On Jan. 10, ACV and Sally entered into a merger agreement with Regis that would spin off Sally into 0.6 of a share, per share of Regis common stock and a special dividend of $3. But the deal was terminated after Regis reported earnings shortfalls and significant revisions to its financial forecasts.
In the days following the termination, Alberto-Culver was approached by Clayton, Dubilier & Rice about acquiring an interest in the company. They announced June 19 that Alberto-Culver would spin off its beauty supply business to the private equity firm and after the spinoff, Sally will be a standalone, publicly traded company, Sally Beauty. CDR will acquire a 47.5% interest in the company, according to a release. Each ACV shareholder will receive a one-time, $25 cash dividend and a new Sally Beauty share in addition to the existing ACV share.
One investor noted that it is a pretty large deal, but was skeptical about the business and did not really understand what the business does. Sally Beauty has more than 2,200 stores that offer products for hair, nail and skin care to salon professionals and consumers.
Standard & Poor's rated the ABL revolver BB- and the term loans B+. The company also plans on taking out $430 million of senior unsecured notes and $280 million in senior subordinated notes to further fund the dividend, which are both rated CCC+. An equity investment of $575 million from CDR will fund the remainder of the dividend. S&P cited the company's highly leveraged pro forma capital structure, thin cash flow projection and the competitive professional beauty supply industry as reasons for the ratings. A company spokesman said Sally's pro forma debt leverage will be approximately 6 times after the spin-off. Moody's Investors Service rated the revolver Ba2 and the term loans B2.