IPO Preview: Bright Horizons Family Solutions

| About: Bright Horizons (BFAM)

Based in Watertown, MA, Bright Horizons Family Solutions (NYSE:BFAM) scheduled a $202 million IPO with a market capitalization of $1.26 billion at a price range mid-point of $20 for Friday, January 25, 2013.

Two IPOs are scheduled for the week of January 21st. The full IPO calendar is available here.

S-1 filed January 14, 2013.

Manager; Joint Managers: Goldman, Sachs/ J.P. Morgan/ Barclays
Co Managers: BofA Merrill Lynch/ Credit Suisse/ Baird/ BMO Capital Markets/ Stifel Nicolaus Weisel/ SMBC Nikko

BFAM is a leading provider of employer paid high-quality child care and early education. BFAM has five times the number of centers as its closest competitor.

BFAM was taken private in 2008 and still suffers from a high debt load, although IPO proceeds are allocated to repay part of the senior 13% annual interest debt.

BFAM is a low 21% to 23% gross margin business. For the nine months ended September 2012, revenue was up 10% to $797 million compared to the year earlier September numbers. Operating income was up 5.5% and proforma net income was up 20%.

At the price range mid-point, BFAM is priced at 59 times proforma earnings, adjusted for the IPO debt repayment. The price-to-sales ratio is 1.2, and the price-to-book value is 1.8.

At 59 times earnings (annualizing September 2012 9 months -- page 11), BFAM seems overpriced. However, it is by far the largest company in the industry, and is the only way to play its segment -- employer paid child care.

BFAM has the characteristics of an institutional favorite, except for the P/E ratio. BFAM's child care centers are normally funded by its employer clients, so access to capital is not an issue.

Although BFAM regularly runs a working capital deficit, it generates positive cash flow because it is essentially a service business that doesn't need a strong balance sheet.

IPOdesktop is positive regarding BFAM. In order to hold or increase BFAM's market capitalization, BFAM will have to increase gross profit and earnings, which means growing top line revenue more than the 10% recorded for the nine months ended September 2012, relative to the year earlier nine months.

BFAM is a leading provider of high-quality child care and early education, as well as other services that are designed to help employers and families better address the challenges of work and life.

BFAM provides services primarily under multi-year contracts with employers who offer child care and other dependent care solutions as part of their employee benefits packages to improve employee engagement, productivity, recruitment and retention

As of September 30, 2012, BFAM has more than 850 client relationships with employers across a diverse array of industries, including more than 130 Fortune 500 companies and more than 75 of Working Mother magazine's 2011 "100 Best Companies for Working Mothers."

Market Leading Service Provider
BFAM has five times more employer-sponsored centers in the United States than its closest competitor, according to Child Care Information Exchange's 2010 Employer Child Care Trend Report.

. Internal growth
BFAM's addressable market includes 15,000 employers, each with at least 1,000 employees, within the industries that BFAM currently services in the United States and the United Kingdom.

As of September 30, 2012, BFAM operated 200 centers for 50 clients with multiple facilities, and BFAM believes there is a significant opportunity to add additional employer-sponsored centers for both these and other existing clients, as well as to increase the number of clients that use more than one of BFAM's four principal service offerings.

. Assume management of existing sponsored child care centers.
. Sustain annual price increases.
. Increase utilization at existing centers.

Demand for child care and early education and elementary school services has historically decreased during the summer months when school is not in session, at which time families are often on vacation or have alternative child care arrangements. In addition, our enrollment declines as older children transition to elementary schools.

. 70% of BFAM's centers operate under the P&L model.
. 30% of centers operate under the cost-plus business model.

Employers typically fund new centers
Employer sponsors fund the majority of the capital required for new centers developed on their behalf, so BFAM has been able to grow its business with limited capital investment, which has contributed to strong cash flows from operations.

Proven Acquisition Track Record
Since 2006, BFAM has completed acquisitions of 123 child care centers in the United States, the United Kingdom and the Netherlands, representing in aggregate $160 million in annualized revenue.

BFAM had a working capital deficit of $77.0 million and $73.3 million at September 30, 2011 and 2012, respectively. BFAM had a working capital deficit of $73.3 million, $54.7 million and $69.5 million at December 31, 2009, 2010 and 2011, respectively.

BFAM believes it is a leader in the markets for employer-sponsored center-based child care and back-up dependent care, and maintains five times more market share in the United States than the closest competitors who provide employer-sponsored centers.

Principal competitors for employer-sponsored centers include Knowledge Learning Corporation, Children's Choice, New Horizons, Kids Unlimited, Childbase and Busy Bees in the United States and the United Kingdom.

In addition, BFAM competes for enrollment on a center-by-center basis with some of the providers named above, along with many local and national providers, such as Goddard Schools, Primrose Preschools, Asquith Court, Catalpa, SKON and Learning Care Group in the United States, the United Kingdom and the Netherlands.

None of the above named competitors are public.

BFAM does not currently anticipate paying dividends.

BFAM expects to net $183 million from its IPO.

Proceeds, along with available cash, are allocated as follows:

Repay $192 million in 13% senior notes incurred when BFAM went private in 2008.

BFAM intends to use the net proceeds from this offering, together with available cash, to redeem all or a portion of the $191.6 million aggregate principal amount and accumulated interest of the 13.0% senior notes, and to use any remaining net proceeds for working capital and for general corporate purposes.

As of September 30, 2012, there was $81.6 million of interest added to principal under the notes. Under the terms of the indenture relating to the notes, BFAM may redeem the notes at a price equal to 106.500% of the principal amount plus accrued and unpaid interest.

If BFAM completes the debt refinancing, then BFAM intends to repay remaining amounts outstanding under the 13.0% senior notes with a portion of the proceeds from such refinancing.

Disclaimer: This IPO report is based on a reading and analysis of BFAM's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.