Apollo Global Management: Red Flags in the S-1

Mar.28.11 | About: Apollo Global (APO)

Apollo Global Management (NYSE:APO) is scheduling a $473 million IPO with a market capitalization of $6.8 billion at the price range mid-point of $18, for Wednesday, March 30, 2011. The total shares for computing the market cap includes 20 million shares estimated to have been vested for stock compensation. APO is based in New York City.

APO might be a $473 million (or less) IPO that expands to $1.1 billion. That's because the S-1 filing contains two prospectuses -- highly unusual and somewhat messy -- see 'note' at the bottom. With that much overhanging supply, seems unlikely APO could rise much from the IPO price, unless it's priced at a big discount, which doesn't seem to be the case.

APO’s 'two in one' S-1 filing is unclear in the number of shares and use of proceeds, which raises a credibility red flag.

  • APO’s financial statements are opaque, which is standard operating procedure for alternative asset managers such as Blackstone (NYSE:BX), KKR (NYSE:KKR), Fortress (NYSE:FIG) and Och-Ziff (NYSE:OZM).
  • Other asset managers such as BX and KKR have had successful IPOs of leveraged buyout portfolio companies. APO has not and in fact had a big stumble when they tried to IPO their Harrahs/Caesars gaming investment. That IPO was pulled.
  • The lack of APO portfolio IPO successes similar to BX and KKR raises questions about the overall quality of APO's leveraged buyout portfolio and their investment management decisions.

Dividends: BX pays a 7% dividend, KKR pays a 6.8% dividend, and OZM pays a 6.3% dividend. APO doesn’t have a stated dividend objective, although it seems likely the market will expect APO to pay dividends in the 7% range.
Valuation: It’s difficult to value companies in APO’s segment because of ‘carried interest’, where capital gains profits are reported when they occur. Reported results are subject to manipulation based on when capital gains are taken.

APO is overpriced using these ratios:

  • Using Assets Under Management (AUM) to market cap ratios, APO at 10 is overpriced compared to BX and KKR, whose AUM / Market cap ratios are respectively 6 and 5. (FIG, however, states clearly their SEC filings that an AUM comparison is not ‘apples to apples’ because each company uses different accounting conventions.)
  • Using Market Cap to Employee ratios APO is higher than BX and KKR. The numbers respectively are 139, 89, and 87. By this ratio APO is overpriced.

APO is priced competitively using these ratios:

  • Using AUM to employees ratios APO is the same range as BX, KKR & OZM. The respective ratios are: APO (14), BX (15), KKR (17) and OZM (15)..
  • Using price-to-book value ratios, APO is in the range with BX & KKR. The respective ratios are APO (4.4), BX (3.9) and KKR (6.4)

Click here for APO valuation metrics.

Market Cap and Economic Net Interest: Comparing P/E ratios of Market Capitalization to Economic Net Interest (ENI) based on reported 2010 numbers, the respective ratios for APO, KKR and BX are 5, 5.6 and 13.3. However, ENI is not a U.S. GAAP measure, which means companies such as APO, BX, KKR, FIG, etc can use customized ENI definitions that suit them best.

For example, in KKR’s 4th quarter & year end report, results were announced for: distribution calculations; distributable earnings; net cash available for distribution; additional distribution; and total distribution. But, in searching KKR’s 2010 10K those words did not appear (?)

Also consider this according to APO:

ENI represents segment income (loss), excluding the impact of non-cash charges related to equity-based compensation, income taxes and Non-Controlling Interests. In addition, segment data excludes the assets, liabilities and operating results of the Apollo funds and consolidated VIEs (consolidated Variable Interest Entities) that are included in the consolidated financial statements. ENI is not a U.S. GAAP measure.

Forced IPO: APO is offering IPO shares based on a private placement covenant in connection with an earlier Rule 144A Offering and Private Placement. An affiliate of Goldman, Sachs & Co. (NYSE:GS) is a selling shareholder and will receive more than 5% of the net proceeds

Alternative asset manager with three segments: private equity, capital markets and real estate.

Dividend Policy: APO plans on paying dividends on Class A stock, but not necessarily to Class B stock. 33% of outstanding stock to be Class A. 67% of oustanding to be Class B stock.

LIBOR Interest Rate Risk: On one billion dollars borrowed to pay dividends.

  • As of April 20, 2007, APO had borrowed the full amount under the AMH credit facility. APO used borrowings under the AMH credit facility to make a $986.6 million distribution to managing partners and to pay related fees and expenses.
  • Amortization: The AMH credit facility does not require any scheduled amortization payment prior to the final maturity date, which is in 2014 with part extended to 2017
  • Interest rate: LIBOR plus 1.5% to 4.25% depending on the specific loan. There is substantial interest risk based on the floating LIBOR rate

Use of Proceeds and Shares Offered
: APO isn’t clear about the number of shares offered and use of proceeds. That’s a big red flag in terms a credibility.

  • On page 89 in the S-1 filed March 21, APO says “The net proceeds from the sale of the Class A shares by this prospectus will be received by the selling shareholders.” Also on page 23 of the S-1 filed March 21, 2011 APO says 100% of the proceeds are going to selling shareholders.
  • But on page 22 APO says “Shares to be Offered for Sale by Apollo Global Management, LLC in the IPO, 18,000,000 Class A shares” and
  • On page 20 under ‘recent developments’ APO says “We plan to use the net proceeds we receive from the Class A shares offered in the IPO for general corporate purposes and to fund growth."

So which prospectus is the "real one" with a firm underwriting?

  • Is it the firm underwriting for 18mm shares from Apollo and up to 8.2mm shares from selling shareholders. But 'up to' is not a firm underwriting.
  • The 'second' prospectus is a 35mm share shelf registration overhang -- but maybe some of those 35mm shares will be sold on the IPO?

Note from the front page of the March 21, 2010 S-1 filing.

This Registration Statement contains two prospectuses.

The first prospectus is to be used in connection with the resale of up to an aggregate of 35,624,540 Class A Shares, representing Class A limited liability company interests of Apollo Global Management, LLC, by the selling shareholders identified in the prospectus who acquired their Class A shares in the exempt offerings referred to in the prospectus as the “Private Offering Transactions,” less the aggregate amount of any shares sold by the selling shareholders in the initial public offering reflected in the second prospectus described below.

The selling shareholders may offer the Class A shares from time to time as they may determine through public or private transactions or through other means described in the prospectus in the section entitled “Plan of Distribution” at prevailing market prices, at prices different than prevailing prices or at privately negotiated prices. However, until a public market develops for the Class A shares, it is expected that the selling shareholders initially will see their shares at prices between $17.00 and $19.00 per share, if any shares are sold.

The second prospectus is to be used in connection with an initial public offering of Class A shares, representing Class A limited liability company interests of Apollo Global Management, LLC. Apollo Global Management, LLC is selling 18,000,000 Class A shares and the selling shareholders are selling up to an aggregate of 8,257,559 Class A shares in the offering.

The selling shareholders that are participating in the offering acquired their Class A shares in an exempt offering referred to in the prospectus as the “Rule 144A Offering.” The Class A shares offered in the offering will be sold by the underwriters to the public and/or securities dealers pursuant to an underwriting agreement among Apollo Global Management, LLC, the selling shareholders and the underwriters. The initial public offering price of the Class A shares in the offering is expected to be between $17.00 and $19.00 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.