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Author Topic: Fotolia Seeking $300 Million To Refinance Debt  (Read 9281 times)

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« on: December 09, 2013, 14:33 »
+16
Moody's Investors Service ("Moody's") has reported that Fotolias revenues for the fiscal year ending December 2012 totaled $87 million. Moodys expects revenues to increase in the low to mid-single digit percentage range over the next 12 months.

The information has become available because Fotolia is trying to raise $300 million in loans.

NEW $200 million 1st Lien Senior Secured Term Loan: Assigned Ba3, LGD3 -- 31%
NEW $100 million 2nd Lien Senior Secured Term Loan: Assigned Caa1, LGD5 -- 85%

An obligations rated Ba is judged to have speculative elements and is subject to substantial credit risk. The 3 indicates that this obligation ranks at the lower end of this rating category.

An obligations rated Caa is judged to be of poor standing and subject to very high credit risk. The 1 indicates this obligation ranks at the higher end of this rating category.

Moodys has assigned a Probability of Default rating to both these obligations. The Loss Given Default (LGD) assessments are opinions about expected loss given default on fixed income obligations expressed as a percent of principal and accrued interest at the resolution of the default.

In June 2012, KKR acquired (http://www.selling-stock.com/Article/fotolia-receives-150-million-growth-investmen) a 47% stake (50% voting stake) in Fotolia from TA Associates (31% remaining ownership) and Oleg Tscheltzoff (Co-founder & CEO) in a transaction which valued the company at $455 million. At that time KKR Capital Markets put in place a $150 million senior financing for the company.

Proceeds from the new debt instruments are expected to fund the refinancing of existing debt, a $161 million special dividend, and transaction related fees. The rating outlook is stable.

Fotolias sales are strongest in the French and German markets and Moodys says the company has a leadership position in these markets. It is not clear that Moodys has examined the sales of Shutterstock and iStock in these markets. Fotolia failed to make an appearance at the recent Microstock Expo in Berlin which drew top microstock shooters from around the world. Shutterstock sent 9 delegates and sponsored several events. Shutterstock has also recently opened an office in Berlin.

Fotolia hopes this refinancing will provide more flexibility for it to expand into new markets.


« Reply #1 on: December 09, 2013, 14:45 »
+11
Borrowing against the business to pay a "special dividend" to shareholders. Now, what does that remind me of? And some of the borrowing is to refinance earlier borrowing, so it's not going into growing the business.

Interesting that Moody's considers it high risk, that must mean they will have to pay high interest rates.  $300m sounds like an awful lot to borrow for a business that has revenues of less than $100m - and does "revenues" mean turnover or does it mean profits?

« Reply #2 on: December 09, 2013, 14:52 »
+12
Borrowing against the business to pay a "special dividend" to shareholders. Now, what does that remind me of? And some of the borrowing is to refinance earlier borrowing, so it's not going into growing the business.

Interesting that Moody's considers it high risk, that must mean they will have to pay high interest rates.  $300m sounds like an awful lot to borrow for a business that has revenues of less than $100m - and does "revenues" mean turnover or does it mean profits?

Revenue is turnover.

And yes, that sounds familiar. And no doubt we all know where the money to pay of this new debt will come from.
Maybe it's time to leave...

« Reply #3 on: December 09, 2013, 14:53 »
+4
Fotolia did have senior staff at the expo, but you are right I dont remember them sponsoring a workshop or having a stand this year. They do however have a very active presence on all kinds of photo related events in Germany, at least I keep running into them.

Yes, "special dividend" doest sound good. Why cant owners pay themselves from hard earned profits instead??

Anyway, I hope some of that debt also gets used to move the business forward, SS is obviously making strong inroads in Europe and just opened a major office in Berlin.

I like to see balance in the market, as much as I like the SS team, I do worry if they become the only strong business in the industry.

And istock seems to have given up the fight long ago.

« Reply #4 on: December 09, 2013, 14:53 »
+6
.
« Last Edit: May 12, 2014, 00:16 by Audi 5000 »

« Reply #5 on: December 09, 2013, 14:56 »
+3
Maybe it's time to leave...
It was time to leave Fotolia many years ago.

You may be right there.

« Reply #6 on: December 09, 2013, 14:58 »
+14
Maybe it's time to leave...
It was time to leave Fotolia many years ago.
And I did.
I don't remember Fotolia doing anything good for photographers, instead they paved the way for some of the most negative developments. I certainly won't weep if they go under and that $87m gets spent elsewhere.

« Reply #7 on: December 09, 2013, 15:11 »
+7
I couldn't care less if FT disappeared and buyers went elsewhere, They are my most disliked agency. I don't understand how they are 3rd in the earning list ?

« Reply #8 on: December 09, 2013, 15:15 »
+10
I certainly won't weep if they go under and that $87m gets spent elsewhere.

No tears here either.

« Reply #9 on: December 09, 2013, 15:36 »
+13
Based on the various readings and discussions from iStock's first bruising at the hands of Hellman & Friedman, the typical period for a private equity outfit to hold an investment is 3 years, at which point they sell or, if they can't, further damage the business  they acquired by taking on new debt to pay themselves a "special dividend".

June 2012 is only 18 months ago, so why KKR is after money so soon is a bit of a puzzle. But then it's a puzzle as to why this sort of practice is even legal!

But, as noted by others, Fotolia is such an awful outfit even by the standards of other microstock agencies, that if they get mangled by KKR, perhaps the other agencies will be the beneficiaries and it'll be good riddance.

It is a shame though, as they started out with such promise, opening up European markets the other agencies hadn't focused on...

« Reply #10 on: December 09, 2013, 15:56 »
+6
Thanks for the news Jim.  I think this would have slipped by most of us.

The sounds like Shutterstock entrace into the German market was quite well timed.  For better or worse...

« Reply #11 on: December 09, 2013, 15:58 »
+6
Thanks for posting this Jim. Interesting stuff.

I'm astonished that FT were valued at $455M with sales of $87M. I think that's roughly the same as SS were valued at the time of the IPO ... when they had double the revenue and without any debt.

This massive borrowing to pay themselves a 'special dividend' is bizarre and clearly damaging to the short and long term prospects of the business. As JoAnne says, I'm surprised it is even legal. What really amazes me is that other PE firms, like Carlyle, are apparently happy to show up and buy the business when it has clearly been stripped bare by the previous owners.

I just had a quick look in my sock drawer to see if I had any money to lend to FT for their 'special dividend'. Sadly there was none.

stocked

« Reply #12 on: December 09, 2013, 16:00 »
+5
I certainly won't weep if they go under and that $87m gets spent elsewhere.

No tears here either.
I agree Fotolia is one of the least contributor-friendly agencies, they had a very negative influence in the development of microstock from a contributor point of view.

« Reply #13 on: December 09, 2013, 16:03 »
+2
Thanks for the news Jim.  I think this would have slipped by most of us.

The sounds like Shutterstock entrace into the German market was quite well timed.  For better or worse...

I think Shutterstock management is very business savvy when it comes to these kinds of things - they have the pulse of the industry and know whats going on, so it isn't mere coincidence that they have opened up an office in Berlin. If and when FT folds, SS will already have a foothold to take on the clients of FT.

Lets just hope that somewhere's down the line, they dont become like every other micro and squeeze the life out their contributers. Anyhoo with the way things seem to be going I am glad I am on my way to set up my own shop through Symbio

« Reply #14 on: December 09, 2013, 16:37 »
+9
This does make it fairly clear why they apparently demote high-ranking contributors' portfolios - they'll want to cut every penny they can to service their borrowings.  It also explains why they might have shut the German office even though it's meant to be their big market.

It is very hard to see how they could possibly service a loan of that size on that turnover. If you borrow $300m at 7% over 10 years you would have to pay back about  $42m a year. To do that, almost 50% of their turnover would have to be profit. And with all the money going into repayments, how would you fund growth? You'd most likely end up like Greece, cutting and cutting and cutting instead of investing and growing, and wondering why things keep getting worse.

« Reply #15 on: December 09, 2013, 16:52 »
+2
H'mm Shutterstock have $$$$ in the bank....they could probably buy them out.

« Reply #16 on: December 09, 2013, 16:53 »
+2
Why cant owners pay themselves from hard earned profits instead??

I may be wrong (but I think I am roughly right): my understanding of this sort of thing is that in the most general terms immediate investors earn their vig on the risk associated with immediately providing necessary funds which the company would not itself be able to raise otherwise. They then make whatever crucial structural and management changes are required to make the company sufficiently attractive for that risk to then be sold on longer term (at cost) on the market.

Roughly. I think. It's fairly normal stuff TBH. If an investment is being sold on then, more or less, I think it is fair to assume that the company is very likely deemed to be in much better shape than it was when it first needed money. Debt itself is not necessarily a big issue - being just one type of corporate finance and less of a burden in many ways than having stock holders in an uncertain market.

Kiss of death obviously, my optimism :)

PS - great thing for the investor is that they get it back now and later!
« Last Edit: December 09, 2013, 17:03 by bunhill »

« Reply #17 on: December 09, 2013, 17:13 »
+1
H'mm Shutterstock have $$$$ in the bank....they could probably buy them out.

would you put your money in a sinking business?
FT doesn't have anything of value that SS would would feel compelled to buy. SS has probably a better quality and just as big of an image bank as FT has - in fact I wouldn't be surprised if 1/4 of it  overlaps with the same images. SS search engine and website is way better for both buyers and contributers I think, so no value there. The only thing of value would be FT's market share in EU - and why buy something that you know you will probably be able to pick up next to nothing in a few years time?

lisafx

« Reply #18 on: December 09, 2013, 17:18 »
+9
Thanks Jim, for posting this. 

Guess Fotolia contributors can look forward to more royalty cuts in the new year.    :P

« Reply #19 on: December 09, 2013, 17:21 »
+2
But then it's a puzzle as to why this sort of practice is even legal!

It does make you wonder. This article scared the "bleep" out of me in the last election.

http://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829

It's a long read, but I thought it was interesting.

« Reply #20 on: December 09, 2013, 17:44 »
-1
Noodle you are probably right but it would be a quicker route

Ed

« Reply #21 on: December 09, 2013, 20:54 »
+8
I pulled out when I figured out their accounting methods are the worst.

When I left, they didn't understand the cash basis or accrual basis of accounting.  They were reporting on a U.S. 1099 what contributors had accrued in royalties - as opposed to what they had actually PAID contributors (read the instructions to form 1099 - it's not reportable until you are PAID the cash).

I brought this up to them - and they were too dense to understand the issue (naturally, contributors don't know a * thing about their business so they can't be bothered to be listened to).

Quite frankly, I don't know how they've survived this long.

« Reply #22 on: December 09, 2013, 23:30 »
+13
i'll lend them the $1.40 I made with them last month.

« Reply #23 on: December 10, 2013, 08:11 »
+6
i'll lend them the $1.40 I made with them last month.

At what rate?  :o :o ;)

« Reply #24 on: December 10, 2013, 12:01 »
+3
Also stopped uploading there a long long long time ago, for their behavior, not for low sales...


 

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