Wednesday, September 5, 2012

Carlyle to Jump Start Dividend, RAC's Debt

Reuters reported:

Private equity firm Carlyle Group wants to pay itself a dividend from its UK roadside rescue business RAC a year after buying it, as the company's performance improves on the back of cost cuts, banking sources said on Tuesday.
Carlyle's dividend would come from RAC's adding debt to its balance sheet. This move is aided by improved EBDITA.

Carlyle's attempts to take cash out of RAC could be done either by refinancing RAC's total debt and taking a payment with the extra proceeds raised or by adding on a new tranche of debt for the sole purpose of taking it as a dividend payment.
As for "cost cuts" enabling the move, they came on the back of workers.  Carlyle didn't take on RAC's pension when it paid Aviva £1.0 billion for the firm.  Carlyle put up £380 million in equity and borrowed £620 million.

Reuters stated Carlyle would go from 3.5 EBDITA to total debt to around 5 under the dividend recapitalization.  This would have Carlyle pulling £170 million in cash out of RAC.  That's nearly half of Carlyle's original investment.

Pensionless RAC workers helped Carlyle achieve a 45% return within a year.  They may wish to talk to their Brintons counterparts.  Debt funded dividends may entice public unit holders.  Borrowing from Peter to pay Paul.  That's one element of a Ponzi scheme.

Update 10-4-12:  Carlyle's RAC debt for dividend is bigger at  £260 million.   Carlyle will increase the interest rate on RAC's debt to facilitate the money bleed.

Update 10-28-15:  Carlyle reportedly has a $1 billion bid for RAC from CVC