In a review spurred by its recent acquisition of Logistyx Technologies, logistics software vendor E2open had its debt rating affirmed by S&P Global Ratings.
E2open (NYSE: ETWO) went public for the second time in early 2021, this time through CC Neuberger Principal Holdings, a special purpose acquisition company. Despite the fact that the deal increased its debt, its operations generate enough cash that S&P, in its examination of the company’s financial position, was confident enough in its capacity to service and reduce that debt to keep the rating at B. E2open has been given a “stable” outlook.
A B grade is “very speculative.” Before the default rating of D, S&P has 12 individual noninvestment — “junk” — grades. The B rating is five spaces below the highest.
E2open’s stock price has dropped 20.4 percent in the last year and 45.1 percent since its 52-week high in late May.
However, S&P is positive about the Logistyx acquisition’s success and sees the company’s expansion as enabling a reduction in debt relative to profits before interest, taxes, depreciation, and amortization.
Logistyx was purchased by E2open for $185 million. E2open took on $190 million in new debt as part of the transaction, which S&P Global said it will use to settle previous borrowings under a revolving credit line and also to deposit more cash on its balance sheet.
In their evaluation, S&P Global Ratings stated, “This incremental debt will somewhat undermine its credit metrics.” “However, we believe that the multi-carrier e-commerce shipment management capabilities and more clients gained through the acquisition of Logistyx will offer it with possibilities to accelerate revenue growth, enhance profitability, and, eventually, deleverage.”
The acquisition of Logistyx provided the E2open supply-chain platform with new e-commerce and small shipping capabilities.
“Logistyx Technologies provides retailers, manufacturers, and logistics providers with a multi-carrier parcel and e-commerce shipping and fulfillment solutions,” S&P Global stated. As a result, “the supply chain transportation management skills E2open will receive from Logistyx will likely boost the overall value proposition of its supply chain solutions,” according to the rating agency.
In addition to the company’s B rating being confirmed, the outlook on the E2Open debt was categorized as “stable,” which means that existing conditions do not make an upgrade or downgrade likely in the foreseeable future.
According to S&P, E2Open has “strong growth prospects” and EBITDA margins near 30%. It has a free operating cash flow of about $140 million.
Even at that level, the company’s present debt load is around 8X EBITDA, a figure that would be expected to result in a debt rating that is regarded as “very speculative.”
The SPAC acquisition is responsible for a large portion of the company’s debt, which is classified as “noncash.” While those commitments must be assessed by rating agencies, the fact that they are noncash means that “it is doubtful they will have a negative impact on E2open’s cash flow generation or liquidity,” according to the S&P assessment.
The increase in free cash flow is substantial. S&P Global Ratings rated E2open as B shortly before it went public via the SPAC. The EBITDA coverage was approximately 5.5X. However, it also had approximately $50 million in free cash flow, compared to the current level of $140 million.
The Logistyx acquisition is E2open’s second purchase to expand the land capabilities of its transportation management products, which are “historically geared to ocean carriers,” according to S&P. It paid $1.7 billion for BluJay Solutions in cash and equity when the acquisition was announced in May 2021. The transaction was completed in September.
E2open’s debt levels were not raised during its most recent quarterly earnings call with analysts, which took place in January. Analysts asked no concerns about its level of leverage, and E2open management did not discuss debt during its remarks.
Revenue of $147.4 million was announced in the company’s quarterly results report for the three months ended on Nov. 30, 2021. Even though BluJay was not yet a part of E2Open in the previous quarter, the combined revenue for E2Open and BluJay would have been $129.5 million. It has yet to publish its profits report for the three months ending in February.
According to a transcript provided by SeekingAlpha, CEO Michael Farlekas stated on the most recent corporate earnings call that E2open’s “organic growth rate is growing, and we are significantly larger than we were one year ago.”
“This is not surprising,” he remarked. “This is the plan, and we hope to follow it for the foreseeable future.”
He also stated that E2open’s organic subscription revenue increased by more than 11% in the quarter ending Nov. 30. He stated that it was 4% a year ago.
E2open’s cash holdings were reduced as a result of the BluJay transaction. E2open has $194.7 million in cash at the conclusion of the three months ending February 28, 2021. By November, it had dropped to $56.5 million, having been supplied in part by the new funding that resulted in the firm being reviewed by S&P Global Ratings.
