Ironman's Recapitalization

A couple of months ago Ironman took out a pretty big loan, $220 million, along with a $20 million revolver. This raised eyebrows and I thought it worth a chapter in a series on what private equity has meant, good or bad, to the sport of triathlon since PE first graced us in 2007.

Consider this the first installment of this series, which will include a look at PE’s influence over Ironman as well as the brands bundled up into what we know as Competitor Group. Those not interested in wonky business and finance talk can pass this by and go read a review of a new Hoka. For the wonks...

Ironman enthusiast Jim Gills formed a company back in 1989 to buy the Ironman from its original owner Valerie Silk. I don’t mean that Valerie incepted the race, but she did, for all practical purposes, incept the business of Ironman. That company the Gills family formed was entitled World Triathlon Corporation (WTC) and it’s still around today, but that company is rebranding the company Ironman so I’ll just call it Ironman from here on in.

Between 1989 and 2004 Ironman’s successive CEOs considered themselves running a licensing company. Its revenues were small because it didn’t produce events, rather it just collected license fees. Let’s say a typical Ironman race pulls in revenues of $1.5 million in registrations, site fees, merchandise and so forth. If you produce that race, you take in $1.5 million, and have expenses against it. If you’re just a licensing company taking in, say, 10 percent of that amount, then you need a much smaller staff, you have no major costs, less risk, but you only take in $150,000. Revenues are small, risks small, income is limited, margins are high.

This was Ironman’s model until Ben Fertic (image just below) became Ironman’s CEO in 2004. Ben decided this was no longer a licensing company cashing checks from race directors like Graham Fraser (Ironman North America, image furthest below) or Ironman licensees in Germany, France, Australia and so forth – along with license fees from Timex and other companies producing Ironman branded goods and services. Ben wanted to own and produce the races, and his first was Ironman Louisville. The second was the 70.3 Worlds. From that day until this, Ironman’s mission has been to acquire and incept, and produce, substantially all its races (there are still a few Ironman licensees where it makes sense, in places like Mexico).

As we all know the number of races worldwide has proliferated, so when you hear that Ironman’s revenues have grown something like seven-fold in the past half-dozen years, part of that is the organic growth of Ironman and Ironman 70.3 races; the other part is taking in the entire revenue from the race instead of just a license fee.

Growing from a $20 or $30 million company to a $180 or $200 million company in 6 years takes a bigger office, a bigger staff, it takes cash flow, the acceptance of more risk, and a lot more attention. I’m guessing at these numbers, but it’s my best assessment of where Ironman is today in revenues (or where it will be in the next annualized cycle). Ironman’s Ben Fertic and Providence Equity Partners’ Jesse Du Bey (an age-group triathlete) husbanded a sale of Ironman to PEP in 2008. Andrew Messick (image above), formerly in charge of the Amgen Tour of California for sports conglomerate AEG was hired in 2011 to build the brand and he remains Ironman’s CEO.

Mr. Du Bey has since left PEP, so, no more swim-bike-runners there, but I can’t find any evidence PEP is unhappy with the investment. Still, 6 years is a reasonably long hold for a PE company and most to whom I spoke thought it would be a surprise if Ironman was not sold inside the next 18 to 24 months. Possible buyers would be a sports and entertainment agency like IMG or CAA, or a European sports conglomerate like ASO or Lagardère, each of which might benefit from a strong global but particularly North American footprint.

Let’s talk about private equity for a moment. One way to distinguish this from venture capital is in the age of the asset: VC likes start-ups, PE likes established companies (there’s another way to parse them, which I’ll describe further below). A typical PE firm does not own assets. It is a management company. It exists on management and success fees, maybe 2 percent a year plus 20 percent of the profits. This management company raises a pool of money and establishes a number of funds. These funds will make investments depending on the capital contribution of the fund. An amount of money is raised, maybe there’s $400 or $500 million in a typical fund, that fund might invest in 5 or 6 companies, at the end of perhaps 7 years that fund matures and these investments are liquidated (sold).

The fund inside of which Ironman sits is known as PEP VI, and is about 7 years old. It’s a big fund, with $12 billion in assets. It follows PEP V, established in 2005, and one assumes VII is forthcoming.

One metric fund investors look at when determining how their money is doing is IRR, which stands for “internal rate of return.” Another is "Cash Out & Remaining Value" divided by “Cash In.” One explanation for this $220 million loan is that it gives investors some at least interim idea what this Ironman purchase has netted them, and returning $220 million to investors helps boost performance metrics.

There’s a second potential reason for this loan, I don’t know if it's relevant in this case, but, remember how PE firms are paid. They, and those instrumental in these deals, are paid in part on the upside. If you never sell an equity how can you commission or bonus someone on it? There may be some tax implications as well, but I haven’t found anyone yet who can tell me what those might be.

The simplest most logical explanation for this $220 loan is to provide investors in PEP VI a tangible return on their investment, demonstrated both in IRR and as Cash Out divided by Cash In.

But it’s just like a refi with a cash-out on your house. Yes, you get the money, but that money just went whoosh, it’s gone, and your monthly mortgage just went up. Can Ironman afford this debt? If this is a loan to be retired in 7 years – which is when this loan matures – and this loan is at a reasonably preferable rate of, say, LIBOR + 4, by my calc the payment for this 7-year “mortgage” is $3 million a month. (Again, this is a private company, I'm not privy to any numbers other than what are published; all these extrapolations are just my best guesses.)

That's a big number, but before you fall off your chairs, let’s place this in perspective. This kind of leveraged debt lopped on the head of a company often, maybe usually, occurs much sooner. Sometimes the purchase of a company is done using that own company as collateral, in other words, Ironman could have been purchased with 40 percent “down” and 60 percent taken as a loan on the company. This would have cashed out the the Gills family in full, with Ironman starting life under its new ownership with a big monthly bill it did not have before getting purchased (search Sam Zell’s acquisition of the Tribune Company).

PEP did not do this. It bought Ironman for cash, allowed Ironman to build and only now, 6 years in, has PEP tapped Ironman on the shoulder and asked for its money back, plus a nice premium. It waited this long, I think, because the first few years were a rough go. Shortly after PEP purchased Ironman it lost Ford as its title sponsor, and it was building a management team without very many races to manage. It was still learning the ropes as an event producer. Each year Ironman’s top line and margins have steadily risen. Two or 3 years ago I doubt Ironman could have afforded this new debt service.

Now is a strategic time, because I think Ironman is running on all cylinders. If Ironman is earning $4 or $5 million in EBIT each month, which I think is possible based on discussions I’ve had with close observers, this would allow Ironman to execute its growth plans while returning money to its investors.

Let’s also consider a line in Moody’s report: “Moody's expects the company to maintain moderate leverage going forward in the 4x to 5x Debt/EBITDA range (Moody's adjusted).” I’m just dividing $240 million by 4.5 and coming up with $53 million EBITDA for the year, divide that by 12 and you get $4.4 million a month.

Also from the Moody’s report: “Moody's expects free cash flow will be over 10% of debt each year over the next several years.” This “debt” according to Moody’s is $240 million, so, 10 percent of that being $24 million, that’s $2 million a month beyond my projection of $3 million in monthly debt service, ergo, this suggests an EBITDA of close to $5 million a month before paying $3 million toward that note.

Why the $20 million revolver? While Ironman might have a million or two each month left over after its obligation to that $220 million loan, stuff happens, and you don’t want to have to go back and try to get a line of credit after already taking out a loan of that size.

One thing about Moody’s rating. In its report on this recapitalization Moody’s gave the firm a B2 rating. This sits deep in the arena of the “highly speculative.” Why would Moody’s give Ironman this, rather than an investment grade, rating? If you look at recapitalizations of companies this size, a B2 represents a ceiling. This B2 rating is middlin' as ratings go but it is, you might say, an A+ rating for firms of this size that have undergone a recap.

Why didn’t PEP just sell Ironman, return that money to investors, and be done with it? I offer no more than a guess. I think it’s because Ironman has only fairly recently begun to make the margins that underpin the price PEP thinks this company is worth. I believe this for two reasons: First, Moody cited “$14 million of cash on the balance sheet” and I would have expected more if Ironman had been earning $4 million dollars every month for a number of years. Second, Moody referenced “low margins” and those I talk to, whose judgment and acumen I trust and who are in a position to know, believe Ironman’s margins to be extremely healthy. Plus, do that math on $4 million a month annualized off even $200 million in revenue; this company’s margins are more like those of a pharmaceutical company with a bunch of patents.

I originally gave you one way to parse between private equity and venture capital. Here’s another definition: VC firms buy companies to build them, while private equity firms buy companies to monetize them. Those who believe the PE world is an exercise in bloodsport remind us that PEP was always going to get its vig. It’s possible that Ironman is leveraged to the hilt and that it’s going to spend every free dollar on debt service. This is the cynic’s – or maybe the hardboiled realist’s – view. We’ll probably know in a year or two. We’ll know once this company gets sold. If it sells for $1 plus assumption of debt, the cynics were right. If It’s sold for $100 or $200 million (a number of people I spoke to think this company will sell for much more), plus the assumption of debt, then PEP treated this property with care.

When you ask how Ironman is going to grow it’s business, those I talk to are split. Some think the top and bottom line growth will come from additional races in underserved markets, like former Eastern bloc countries. Consider that there’s always an upper class, everywhere. Mexico’s triathlon series is going gangbusters, with 2 dozen races in that country, each race fielding between 1000 and 4000 athletes (including 4 Ironman or 70.3 events). Other people suspect Ironman’s upside is in merchandising and licensing. Really, the two go together. The more ubiquitous Ironman becomes through more races in more places, the more it becomes endurance sport’s NASCAR (we know how Slowtwitchers like their trucker hats).