The tie-up with Avast will create a new major player in the consumer online security space. Still, some investors are concerned that stock buybacks and further acquisitions could delay the company’s plans to bring leverage back down.

This week a syndicate group led by Bank of America and Wells Fargo launched a $1.5bn two-part bond package to fund the deal. The deal was upsized from $1.2bn at announcement and is expected to be split between 2027 and 2030 notes that are talked at 6.875% and 7.25%, respectively.

Proceeds from the notes will be used to effectively replace debt that has already matured — NortonLifeLock’s $525m 2% 2022 convertibles, which came due in August, and its $400m 3.95% senior notes that matured in June.

But the deal is also part of a broader capital raising strategy to fund the acquisition of Avast. In August last year, NortonLifeLock raised a $1.75bn TLA, followed by a $3.69bn TLB and $410m incremental TLA this February.

Those deals, combined with the new bonds, raise NortonLifeLock’s total debt to $9.9bn, compared to $3.86bn prior to the acquisition. However, the Avast deal should increase free cash flow and allow the company to quickly reduce its debt burden, sources said.

NortonLifeLock is pitching the deal on pro forma adjusted EBITDA of $2.28bn, including $497m of EBITDA from Avast and building in $280m of annual cost synergies, according to an investor presentation.

“It's a higher quality name in a market that's risk-off, and it actually generates free cash flow,” one investor said. “That’s a lot different than a double-digit levered LBO.”

The coupon differential between the two tranches is fairly scant, so “to have the shorter tenor suggests they expect to delever quickly,” said one buysider following the deal.

Diversion

However, other sources placed little importance on the shorter tenor when it came to forecasting debt reduction. They were focused instead on the potential for free cash flow to be diverted towards equity investors.

“This is a company that has the cash flow to support 10x leverage,” said a portfolio manager said. “But my guess is a majority of the cash flow goes to shareholders.”

NortonLifeLock is maintaining its $0.125 per share quarterly dividend, and could implement a post-merger share buyback of up to $3bn depending on Avast shareholder elections.

The company is telling investors that its goal is to reduce leverage back down to the 2x-3x area “over the long-term.”

S&P, which affirmed its BB- rating on the unsecured notes, said that was certainly possible — but it also noted the potential for more M&A in the future.

“We believe acquisitions are an important part of [NortonLifeLock’s] growth strategy,” S&P wrote. “Given the high fragmentation in consumer security and privacy, we believe there are many potential targets NortonLifeLock could pursue after it integrates Avast.”

Cybersecurity is a fragmented market, where companies are aggressively consolidating. Just last year NortonLifeLock bought its German-based rival Avira; earlier this year McAfee was bought out by a consortium of PE sponsors, and large players such as Microsoft and Google are also active buyers.

Some sources noted the similarities between NortonLifeLock and McAfee, and suggested Norton’s leverage was “manageable” given its strong free cash flow.

“It’s a great business — similar to McAfee, though leverage is not going to be as high,” said another buysider. “People are just starved for new issue. I think it will trade OK, as it's the only deal out there.”

However, the slide in tech valuations since the deal was agreed last year is weighing on some investors looking at the deal — especially given how much the economic outlook has deteriorated over recent months.

“NortonLifeLock probably paid too much for Avast,” said the portfolio manager. “It’s a sticky business that generates a lot of cash, but not where we want to put our money right now.”

Leads BofA and Wells Fargo declined to comment. NortonLifeLock did not respond to a request for comment.

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