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Rating Action:

MOODY'S UPGRADES CERIDIAN CORPORATION'S PREFERRED STOCK TO 'b1' AND PLACES COMDATA NETWORK, INC.'S LONG TERM DEBT ON REVIEW FOR POSSIBLE UPGRADE

30 Aug 1995
MOODY'S UPGRADES CERIDIAN CORPORATION'S PREFERRED STOCK TO 'b1' AND PLACES COMDATA NETWORK, INC.'S LONG TERM DEBT ON REVIEW FOR POSSIBLE UPGRADE New York, 08-30-95 -- Moody's Investors Service upgraded Ceridian Corporation's 5-1/2% convertible exchangeable preferred stock from "b2" to "b1." The shares have an aggregate liquidation preference of $236 million. Moody's also placed Comdata Network, Inc.'s long-term debt ratings on review for possible upgrade. Comdata's $130 million of 12.5% senior notes, due 1999, are rated B1 and its $75 million of 13.25% senior subordinated debentures, due 2002, are rated B3.
On August 24, 1995, the companies jointly announced that Ceridian had agreed to offer its common stock to acquire Comdata's common and preferred shares. Ceridian also said it would assume Comdata's $227 million of debt, including the rated notes. The acquirer said it intends to refinance Comdata's borrowings by raising lower-cost debt to finance a tender offer. It also plans to solicit consents from Comdata noteholders for modifications of existing note indentures. The $1.1 billion aggregate purchase price, including assumed debt, represents a 16-times multiple of Comdata's latest 12-months EBITDA. Completion of the transaction is subject to certain conditions.
The "b1" rating reflects Ceridian's improving results of operation, strong cash flow, high recurring revenues, and strong debt and preferred stock protection. Mitigating concerns include uncertainties and risks relating to Ceridian's expected future acquisition activity, and the possible sale of the company's defense electronics business and the concomitant loss of operating profits and the application of sale proceeds.
Ceridian's employer services unit generates strong cash flows and is well positioned to benefit from the growing trend by companies to outsource non-core data processing activities. To date, only about 25% of companies with 100 or more employees -- Ceridian's primary market -- have opted for outside payroll and tax filing services. The company has been an active acquirer of related businesses through which it hopes to offer customers a broader range of high quality, value-added human resources services. The Arbitron unit enjoys strong margins and the paramount position in the radio ratings business. It is enhancing services and expanding into cable and electronic media. The two information-services businesses, while accounting for about 50% of 1995 revenues before the Comdata acquisition, should generate about 70% of operating profits. Ceridian's defense electronics unit, while sporting lower margins because of a heavy reliance on government work, has been a stable business and not particularly affected by post-cold war cuts in defense spending.
A sizable component of company revenues are derived from long-term contracts and are highly predictable. Through assiduous cost cutting and a complete revamping of senior management at all operating units over the last few years, Ceridian has demonstrated its ability to achieve steady improvement in operating margins. Moody's anticipates more improvement from extensive data-center consolidation and overdue technology investments. Leading competitors in the employer services business earn significantly higher margins than Ceridian, underscoring the potential for further gain.
Coverage ratios are good. Although almost debt-free, Ceridian has significant operating lease costs. These should, however, decline over time as data centers are shuttered. For the 12-months ended June 30, 1995, EBITDA less capital expenditures represented 2.6-times interest expense, rents and preferred dividends. Added protection is provided by almost $200 million in cash and short-term investments at June 30, 1995. Ceridian's $1.3 billion in net operating loss carryforwards, a legacy of its predecessor Control Data Corporation, provides another important source of cash.
Comdata, while burdening Ceridian with an estimated $225 million in new long term debt after the refinancing, also brings EBITDA margins (before interest income) that are significantly higher than Ceridian's (about 30% vs. 12% for the latest 12-months). After refinancing the assumed debt at lower costs than now paid by Comdata, the combined change in fixed charge coverages should be negligible. The acquisition should accelerate Ceridian's use of the NOLs, thereby increasing their value, which should favorably affect the price of Ceridian's common shares. A higher price would raise the likelihood that the preferred will be converted on or after January 1, 1997, when Ceridian can first force the redemption of the preferred. While Ceridian has the right to exchange the preferred stock for debt of comparable terms, this would impede its ability to benefit from the huge NOL carryforward.
Ceridian management has stated that it is eager to grow through acquisition in the information services field where it expects further consolidation. Moreover, Comdata management will have greater wherewithal to pursue its growth ambitions after the acquisition. While Moody's expects future acquisitions to be financed with stock owing to its high valuation and management's desire to obtain pooling accounting to avoid increasing goodwill, Ceridian's leverage could increase if companies acquired are highly indebted. Moreover, if the stock price plummets, management might be tempted to use its sizable cash balances and the preferred stock might not be converted.
While the defense electronics business (CDI) has been reporting better than adequate results in recent years, management has plainly indicated that it sees Ceridian's future in information services. Thus, Moody's expects that the company will be highly responsive to an attractive offer for CDI. Moody's cautions that, in addition to the loss of CDIs earnings, the company might opt to apply the proceeds from the sale to repurchase its common shares. However, Moody's believes the paydown of debt would be more likely after the Comdata acquisition.
Regarding the Comdata rating, Moody's said its review will consider the terms of the proposed merger agreement and the operating and financial prospects for the consolidated entity and for Comdata as a subsidiary. As some notes could remain outstanding after the tender offer, Moody's will evaluate the relative position and asset protection of the remaining notes vis-…-vis any new financing that is secured by Comdata assets. As part of a larger company, Comdata may benefit from improved access to capital to fund growth. If the tender offer is successful in fully redeeming the notes, Moody's said the ratings would be withdrawn.
Comdata Network, Inc, a wholly-owned subsidiary of Comdata Holdings Corporation, based in Brentwood, Tenn., provides financial transaction and information services to the transportation and gaming industries.
Ceridian, headquartered in Minneapolis, Minn., is an information services and defense electronics company.
No Related Data.
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