IT Software Shop SolarWinds Shakes Up IPO With Lower Price

Update: After lowering its range (see below), SolarWinds priced its IPO at $15 per share. As MarketWatch notes, the company’s 25 million share offering at that price yields $375 million in gross proceeds for the firm, before taking into account its greenshoe offering.

It’s a good-sized haul for the highly-indebted company that intends to use IPO income to lower its indebtedness (5 million shares sold did not come from the company itself, lowering SolarWind’s net take-home pay). But the firm will still be closer to $2 billion in debt than $1 billion, even if it puts its full IPO haul against its obligations.

At $15 per share, SolarWinds priced about 21 percent under its original, upper-range price estimate of $19 per share.

Morning Markets: Good morning, your humble servant didn’t die flying into Newark and then Providence overnight, and is thus happy to report on some SolarWinds IPO news.

Earlier this week the SolarWinds IPO looked huge. The IT software company intended to sell tens of millions of shares at a price of $19.00. The total package was worth over $900 million at the highest point. Sure, the majority of the shares in play at the time were sourced from extant shareholders, but it still looked like a big damn IPO.

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Now it’s smaller, but potentially more lucrative for Austin, Texas-based SolarWinds, at least in terms of cash in the door.

According to a recent SEC filing, SolarWinds is making a number of changes to its offering. Instead of a price range skating as high as $19 per share, the company intends to list for between $15 and $16 per share.

That’s a notable price cut in a market that has allowed several unprofitable tech companies to raise their range and still record strong first-day results. SolarWinds was a public company before being taken private in 2015 for $4.5 billion.

But there’s more at play than just a change in price. The SolarWinds offering, in its new form, includes more shares from the company itself (20 million, instead of 15 million), and fewer from existing shareholders (5 million, down from 25 million). The underwriter’s option was also cut from 6.3 million shares to 3.75 million.

Those changes bring the company’s full IPO sheaf down to around $460 million at $16 per share, presuming full exercise of the underwriter’s option.

SolarWinds, notably, has strong operating profit and EBITDA results but loses money on a net basis due to some exotic-ish expenses (“Unrealized net transaction gains (losses) related to remeasurement of intercompany loans”), and the cost of its debt. SolarWinds is carrying billions in debt, which drags its healthy business into a bucket of red ink.

Here’s the scale of the problem:

“We entered into credit agreements in 2016 and 2018. As of June 30, 2018, our total indebtedness was $2.3 billion and we had $125.0 million available for additional borrowing under our credit facilities. Our net interest expense during the years ended December 31, 2016 (on a combined basis) and 2017 and the six months ended June 30, 2018 was approximately $170.4 million, $169.8 million and $76.5 million, respectively.”

That’s a lot of coin for SolarWinds, which had $400 million in revenue in the first half of this year.

And as the company isn’t growing super quickly, especially compared to other recent offerings, I can almost see why it’s having to cut its price. Would you rather put your money into a company still in its growth window that is losing money due to investing into itself; or, would you rather sink your capital into a company that is growing more slowly, and is losing money due to debt that it won’t get out from under for a long, long time?

Bingo.

More when SolarWinds prices.

Illustration: Li-Anne Dias