Banks Prep $1.6B Facility For Brocade
July 29, 2008
Bank of America and Morgan Stanley are arranging a $1.6 billion credit facility for San Jose, Calif.-based technology company Brocade Communications. The facility will consist of a $125 million revolver and as much as $1.5 billion under a five-year term loan and a 12-month unsecured bridge facility, according to Securities and Exchange Commission filings. The proceeds from the debt package, along with available cash on hand, will help fund Brocade’s acquisition of Foundry Networks in neighboring Santa Clara, California.
The acquisition, which is worth approximately $3 billion, is expected to close in the fourth quarter, subject to Foundry’s shareholders and regulatory approval and other conditions. Brocade plans to use roughly 12 million shares of new common stock and $1.4 billion in cash to help fund the deal.
Brocade says it expects to generate enough cash to repay a substantial portion of the debt over the next two to three years and estimates that its debt-to-Ebitda ratio will be between 2.4x and 2.5x, an attractive amount of leverage compared to other highly-levered deals in the market today.
“This [acquisition] is an important step that builds on our vision for evolving next-generation data centers and networks,” Mike Klayko, Brocade’s CEO, said during a conference call. “The time for the strategic combination is now.”
Market participants at the beginning of the year forecasted a wave of consolidation would hit the tech market as companies look to branch out and tackle new markets (BLR, January 14, 2008).
“We believe the industry is at an inflection point in the way enterprise and service provider networks and data centers are being designed,” said Klayko. “Customers are demanding networking solutions that meet the needs for today and can address the many advances in network convergence that are still ahead.”
The facility, according to SEC filings, will include several covenants, another attractive feature for investors. These could include a maximum consolidated leverage ratio, a maximum consolidated senior secured leverage ratio and a minimum consolidated fixed charged coverage ratio tests.
Brocade was rated B+ by Standard & Poor’s in 2004.
Its second quarter revenues increased to $354 million from $347 million compared to the first quarter spurred by the growth of new products and the acquisition of information technology service provider Strategic Business Systems.
Brocade and Foundry produce parts for computer networks and servers that are sold to a wide array of companies, including EMC, Hewlett-Packard and IBM. Sales likes these generate about 70% of Brocade’s revenues.
New orders for computer products year to date are down 1% compared to the same period last year, noted CreditSights analysts in a report last week. The slight drop, they said, is due to reduced information technology spending at financial institutions.
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