Bright Horizons Family Solutions (BFAM) made its public debut on Friday, January 25th. Shares of the provider of child care and early education services ended their first day with gains of 28.7% at $28.32 per share. From that point in time, shares moved between $27-$31 per share, closing at $28.70 per share on Thursday.
The Public Offering
Bright Horizons is a leading provider of child care services which are designed to help employers and families to better address challenges they meet. The company has multi-year contracts with employers who offer child care as part of their employee benefits packages.
Bright Horizons sold 10.1 million shares for $22 apiece. Bright Horizons raised $222.2 million in gross proceeds in the offering process. Based on the offer price of $22.00, the company is valued at approximately $1.38 billion.
The offering was a huge success. The offer price was set above the preliminary $19-$21 price range set by the firm and its bankers. In total, 16% of the company's shares outstanding were offered. At Thursday's closing price of $28.32, the firm is valued at $1.80 billion.
The major banks that brought the company public were Goldman Sachs, JP Morgan, Barclays, Bank of America/Merrill Lynch and Credit Suisse, among others.
The company operates 776 child care locations in the US, UK, Netherlands, Ireland, Canada and India. In total, the facilities of Bright Horizons have a capacity to serve 87,700 children. The company has a total of 850 client relationships, including 130 of the Fortune 500 companies.
The company reported annual revenues of $973.7 million for 2011. The company reported a $4.8 million profit for the year attributable to the company, which resulted in a $68.1 million loss to shareholders.
For the first nine months of 2012, Bright Horizons generated revenues of $797.5 million, up 10% on the year before. The company reported a net income of $4.0 million, and a loss of $59.1 million attributable to its shareholders.
Bright Horizons expects to receive roughly $222 million in gross proceeds from the offering, or almost $200 million in net proceeds. The company will repay most likely the entire portion of $191.6 million of its 13.0% senior notes which are due in 2018. The move could save the company approximately $25 million in interest payments per year.
Based on Thursday's valuation of $1.80 billion, the market values the firm at roughly 1.7 times 2012's expected annual revenues of $1.07 billion. The company is on track to report modest net losses for the year, due to the high leverage employed, but is profitable on an operating basis.
As noted above, the offering of Bright Horizons has been quite a success. Shares were initially offered 10% above the preliminary offering range and closed 43.5% above the preliminary midpoint range on Friday.
Demand for the offering was great, especially among institutional investors. The company went private when Bain Capital LLC bought the business back in 2008. Following the public offering, Bain Capital will remain to hold an 80% stake in the company.
CEO Lissy continues to believe in the long term prospects of the business, "We've long believed that employers would continue to take an interest in the life issues that affect how productive people can be at work and help them navigate work-life obligations." He furthermore added that part of the attraction is a long-term demographic shift toward more families with two working parents, plus a greater number of working mothers with young children.
The company operates with $923 million in total debt, at the end of September 2012. The company furthermore held $45 million in cash, for a net debt position of $878 million. The net debt position will fall below the $700 million mark after retiring its notes with the proceeds of the offering. The lower leverage ratio allows the company to further refinance its current debt at lower interest rates.
The business model is very attractive for investors. Favorable demographic shifts and long-term relationships, coupled with a 97% retention rate, results in predictable cash flow streams.
Despite the long-term attractiveness of the business and the entire industry, I remain on the sidelines. Even after retiring the high interest rate notes, the company will continue to operate with a very sizable debt load and struggle to report net profits. These concerns in relationship to the rich valuation, and the strong recent share price performance, are sufficient reasons for me to withhold making an investment at the moment.