McAfee will have spent less than two years as a public company once the buyout closes, with previous owner TPG, still a large shareholder, floating it in October 2020. The consortium’s $26 per share offer is a premium to the $20 IPO price, though it’s a very different business — during its short time as public company McAfee spun off its Enterprise division, selling to Symphony Technology Group for $4bn.

It used $1bn of this to pay down debt, $300m for taxes, $175m for transaction costs, and around $2.45bn to pay a special $4.50 dividend. The sale price presented a multiple of around 12x Ebitda.

The rest of the company, valued at $14bn in the buyout, is now a purely consumer-facing antivirus group.

The consortium consists of sponsors and more strategic capital. The sponsor group is Advent, Permira, and Crosspoint Capital, a specialist sponsor focused on cybersecurity and headed by managing partner Greg Clark, former chief executive of Symantec, another antivirus software firm.

The strategic capital group includes some of the biggest buyout partners sponsors can turn to — Canadian pension fund CPPIB, and sovereign wealth money from Singapore’s GIC and Abu Dhabi’s ADIA.

Advent and Permira are lead sponsors, and are “seamless” on strategy, according to one source close to the deal. GIC and ADIA are taking a more passive role as capital providers.

PSP, another Canadian pension fund, acting through its credit arm, and Neuberger Berman will be subscribing for $800m of preferred equity.

The debt part of the capital structure includes $4.41bn of dollar TLB, $1.25bn-equivalent of euros, $1bn-equivalent of secured bonds and $2.32bn-equivalent of unsecured bonds. The bond split has yet to be revealed, but is likely to lean heavily on dollars, though there have been reverse enquiries for euro-denominated unsecured bonds to be issued.

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Given the high profile, the McAfee deal was heavily pre marketed, and the company had some existing facilities outstanding, meaning leads had a strong book in place before the general syndication launched on Monday. 

JP Morgan is physical arranger on the loans, joined by a cast of thousands — BofA, Credit Suisse, Barclays, Citi, HSBC, RBC Capital Markets, UBS, BMO, KKR, Macquarie Capital, Mizuho, MUFG, Nomura, Wells Fargo, BNp Paribas, CIBC, Citizens, Credit Agricole, Fifth Third, Intesa, KeyBanc, Natixis, Societe Generale, Standard Chartered, Stifel Nicolaus, SMBC, TD Securities and ScotiaBank

McAfee’s corporate ratings are B3/B- with Moody’s and S&P respectively — below the CLO sweet spot, as these ratings pull down a CLO’s weighted average rating factor. However, investors are said to be looking for yield, rather than rating-constrained.

“The dynamic right now is that lenders are looking for anything with a spread that meets their hurdles, and that means a level of around 375 bps in euros,” said a sellside source. “That can be B2, B3, and highly levered, if it’s a quality business, but it might be harder to bring a low-levered business and push for 300 bps in this environment.”

In Europe, software company AutoForm raised €472m of 6.4x levered first lien debt at 362.5 bps on Wednesday — far smaller than McAfee of course, but a tech business with sticky revenues and high leverage. 

The pipeline is stacked with potentially massive deals — athenahealth is already out in the US-only market with a similarly-sized deal, featuring $5.75bn of term loan B and $2.5bn of unsecured bonds. Hunter Douglas and Scientific Games Lotteries have also come out with large deals since the McAfee launch.

Elliot Management and Vista Equity Partners’ bid for Citrix, a remote working software provider, could come with around $14bn of debt, likely led by dollars.

In Europe, Morrison’s is expected to launch the financing for its takeover by CD&R soon — potentially waiting on Christmas trading figures — while further out, European-based monsters could include Unilever’s tea division, KKR’s move on Telecom Italia, and GSK Consumer Products, if Unilever’s bid for the division fails. Various sponsors are also lining up bids for UK pharmacy retailer Boots.

Sponsors doing larger deals — with the support of the likes of the sovereign wealth funds — tends to generate a virtuous circle, provided the market can bear the financing.

For one thing, larger deals are more likely to be companies which are leaders in their categories, as McAfee is. For another, the liquidity of the financing instruments allows the larger investment groups to get comfortable writing large cheques. If a Blackstone Credit or a Barings puts down $250m in the McAfee capital structure, they’ll be one of many, not the anchor on which the whole deal is riding, and there’ll be sufficient trading activity to exit down the road.

Several leveraged finance bankers have been guesstimating max LBO sizes over the last few months, with increasingly large companies in play, and landmark deals such as Medline executed. €12bn-€15bn of funded debt for a European company seems plausible, while junior capital in pref or PIK form has never been so liquid, potentially adding, as in ThyssenKrupp Elevator, another €2bn or so.

Equity markets have been wildly volatile this week and last, and some nervousness has crept into high beta credit, but the loan market appears to be holding firm so far.

“On Monday, one of the worst days in equity markets for a long time, we had loans off maybe a quarter of a point,” said the sellside source. “Loans are always a little more stable, and being floating rate instruments they’re insulated to an extent from the rates concerns. High profile deals will still be getting done despite the backdrop.”

What’s the leverage?

As a P2P transaction, McAfee comes with a lot of public disclosure — and a lot of different leverage figures.

Adding up Adjusted EBITDA for the 12 months to September 2021 gives $823m, while preliminary estimates for the year to December 25 (one senses last year’s Christmas was an unfestive season for the McAfee deal team) were $889m-$899m.

Adding back costs to split off the Enterprise division bumps this range up to $972m-$983m, but the sponsors and banks prefer an even healthier “Pro Forma Financeable EBITDA” of $1.155bn, which adds in adjustments for deferred revenue and planned price increases.

This takes senior secured net leverage down from a highly aggressive 7.8x to a more modest 5.5x, or from 10.7x through the unsecured to 7.6x.

The rating agencies see things as somewhat punchier than the sponsors — S&P pegs leverage at over 10x and Moody’s estimates 9x, though they still found a way to get to market-manageable B-/B2 ratings on the first lien debt.

Total enterprise value is between 12.8x and 18x Ebitda, based on the range above.

Everyone agrees, however, that the company is growing, and that margins are juicy — as should be the case for a software firm with no marginal cost of production.

Revenues grew 23% for 2021, and Adjusted EBITDA grew 36%. Adjusted EBITDA margin was 45% for the nine months to September 2021, and the company claims it can hit 50% as the one-off costs of separating Enterprise roll off.

The agencies are also supportive. Moody’s said it “expects solid mid-single digit or higher growth over the next several years driven by consumer concerns over digital security and the ongoing shift of consumers to a digital world. Prior to the pandemic, McAfee was able to grow revenues despite declining PC sales through bundling of new products and services as well as a successful multi-channel sales strategy.”

“This deal is going to de-lever very very quickly,” said a source close to the situation. “Even if you take a haircut to the sponsor numbers out there, in 12 to 18 months leverage is going to come down materially based on this trajectory. Even if you just look at the last quarter you can see it — the deal is being marketed on LTM Q3 numbers but if you take the earnings flash for Q4, that’s half a turn of deleveraging already.”

While McAfee is the market leader in the segment, the bull case is that relatively few internet users have any form of paid security package — under 5%, according to one study — meaning there’s plenty of potential for the total market size to increase.

“There’s a massive white space to go after,” said the source close. “These guys have the brand and the scale and the distribution to capture some of that. They just need to maintain this position in the market and they’re positioned well to grow into that white space.”

What’s the competition?

Antivirus software has produced some big ticket M&A elsewhere — including among McAfee’s major competitors in the consumer space, Norton Antivirus and Avast. 

Norton’s parent Symantec paid a $9.2bn enterprise value for Avast, a multiple north of 17x, depending on assumptions. Avast boasts a 56% Adjusted Ebitda margin though, well above that of McAfee.

The Norton-Avast takeover has yet to clear competition authorities, however, with the UK’s competition board looking into the deal. Symantec shifted its own enterprise business to Broadcom in 2019, for a price of $10.7bn — a 8.2x multiple on the pro-forma Ebitda at the time.

“McAfee has competed separately and successfully with Norton and Avast for years,” said the source close. “We’d expect the two firms to be focused at first on the merger, achieving their synergies and integrating the businesses, but it’s also worth noting the point earlier about the white space for consumer cybersecurity. It’s not a zero sum game, and all parties have room to grow.”

A European buysider said: “I think it’s a popular enough credit in America, because previously there was no competition, but you never know if it’s under threat from smaller more innovative players. We’re a bit more cautious than we have been in previous years.” 

The basic business is pretty simple — sell and retain subscriptions to virus software. 

McAfee does much of its new sales through bundling its software onto new hardware items, with customers asked to subscribe following a trial period. This piece, indeed, was written on a new Dell laptop with precisely this arrangement in place.

Around 75% of sales are direct to consumers, including through bundled software on new computers, with the remainder indirect, meaning through mobile providers, ISPs, electronics retailers, ecommerce sites, and search providers. 

The proportion of direct revenues has declined year on year, at 72.5% for the three months to September 2021, compared with 77.2% in the prior year quarter.

63% of direct sales are renewals, with 9% new booking through McAfee.com or preinstalled software. The company said revenues in the direct renewals space are growing at 19%, compared with 25% in new direct booking and 29% in indirect bookings.