Logistics software provider E2open, carrying a heavy amount of leverage, had its debt rating affirmed by S&P Global Ratings in a review triggered by its recent acquisition of Logistyx Technologies.
E2open (NYSE: ETWO) became a public company for a second time in early 2021 via CC Neuberger Principal Holdings, a special purpose acquisition company. But though the transaction left it with greater debt, its operations are generating enough cash that S&P, in its review of the company’s debt position, was confident enough in its ability to service and reduce that debt that it held the rating at B. E2open received a “stable” outlook.
A B rating is considered “highly speculative.” S&P has 12 individual noninvestment — ”junk” — ratings before the default rating of D kicks in. The B rating is five slots from the top.
E2open’s stock price is down 20.4% in the past year and down 45.1% since it reached its 52-week high in late May.
But S&P was optimistic about the success of the Logistyx acquisition and sees the company’s growth as enabling a lightening of the debt load relative to earnings before interest, taxes, depreciation and amortization.
E2open acquired Logistyx for $185 million. As part of the acquisition, E2open took on $190 million in new debt, which S&P Global said it would use to repay existing borrowings under a revolving credit line, and also to put more cash on its balance sheet.
“This incremental debt will slightly weaken its credit metrics,” S&P Global Ratings wrote in its review. “However, we think the multi-carrier e-commerce shipment management capabilities and additional customers it has gained through the purchase of Logistyx will provide it with opportunities to accelerate its revenue growth, improve its profitability and — eventually — deleverage.”
The acquisition of Logistyx gave the E2open supply-chain platform e-commerce and small shipment capabilities that it did not previously possess.
“Logistyx Technologies offers multi-carrier parcel and e-commerce shipping and fulfillment solutions to retailers, manufacturers and logistics providers,” S&P Global wrote. With that, the ratings agency said, “the supply chain transportation management capabilities E2open will gain from Logistyx will likely enhance the overall value proposition of its supply chain solutions.”
In addition to the affirmation of the company’s B rating, the outlook on the E2Open debt was listed as “stable,” which means current conditions do not make an upgrade or downgrade likely anytime in the near future.
S&P said E2Open had “robust growth prospects” and EBITDA margins near 30%. Its free operating cash flow is roughly $140 million.
But even at that level, the company’s current debt load is roughly 8X EBITDA, the type of number that would be expected to produce a debt rating considered “highly speculative.”
Much of the company’s debt is considered “noncash,” relating to the SPAC acquisition. While those obligations are required to be considered by ratings agencies, the fact that they are noncash means “it is unlikely they will negatively affect E2open’s cash flow generation or liquidity,” the S&P report said.
The growth in free cash flow is significant. Just before E2open went public via the SPAC, S&P Global Ratings also rated the company as B. The EBITDA coverage was about 5.5X. But it also had free cash flow of about $50 million, compared to the current level of $140 million.
The Logistyx acquisition marks the second purchase by E2open that enhanced the ground capabilities of its transportation management solutions, which “historically catered to ocean carriers,” S&P said. It acquired BluJay Solutions in May 2021 in a cash and stock deal estimated at $1.7 billion when announced. The acquisition closed in September.
E2open’s debt levels were not an issue in its most recent quarterly earnings call with analysts, in January. There were no questions from analysts about its level of leverage, and E2open management did not discuss debt during its remarks.
The company’s quarterly earnings report for the three months ended Nov. 30, 2021, reported revenue of $147.4 million. In the corresponding quarter a year earlier, even though BluJay was not yet part of E2Open, the combined revenue for E2open and BluJay would have been $129.5 million. It has not yet released its earnings report for the three months through February.
On the most recent company earnings call, CEO Michael Farlekas, according to a transcript supplied by SeekingAlpha, said E2open’s “organic growth rate is accelerating, and we are much larger than we were one year ago.”
“This is not unexpected,” he said. “This is the plan, and we expect to execute this very plan for the foreseeable future.”
He added that in the quarter ending Nov. 30, E2open’s organic subscription revenue growth was more than 11%. It was 4% a year earlier, he said.
The acquisition of BluJay did contribute to a reduction in E2open’s cash holdings. At the close of the three months ending Feb. 28, 2021, E2open carried cash of $194.7 million. By November, it was down to $56.5 million, replenished in part by the new financing that led to the S&P Global Ratings review of the company.