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Carve-Out IPO McAfee Benefits Its Private Equity Owners, Not You and Me

McAfee Corp (NASDAQ:MCFE) went public on Oct. 22 at $20 per share, raising about $600 million for the company. However, if you buy MCFE stock — now around $15.90 a share — you should be aware that this is a classic “carve-out.” Whatever happens with the money raised will likely benefit the majority owners who “carved out” a stake for the public.

view from outside McAfee headquarters
Source: Tada Images /

This is because McAfee shareholders are actually only minority owners (37.4%) of the technology company. Private equity holders — in this case, TPG, Thoma Bravo and Intel (NASDAQ:INTC) — own the majority (60.2%) of shares.

Confusing Corporate Structure Under MCFE Stock

Looking closely at the deal, some $525 million of the proceeds from the offering meant to benefit the company actually goes to banks. This benefits the private equity owners that are on the hook for the technology company’s debt.

Notice I did not say McAfee’s debt. That is because the public company shares of McAfee Corp. are actually only shares in an LLC technology company. That LLC technology company is Foundation Technology Worldwide, LLC.

If you think this is confusing, that is because the private equity owners wanted it to be. Nevertheless, it is completely laid out in plain but confusing English on the very first page of the IPO prospectus.

For example, the name “Foundation Technology Worldwide” is found 300 times in that prospectus. It is the company McAfee IPO investor are actually buying into. In other words, all of the MCFE stock offered in the IPO is actually a publicly traded minority share of a private LLC company.

I think this is a poor way of conducting an IPO. The minority shareholders could have changed this structure, making, instead, McAfee the operating company rather than Foundation Technology Worldwide LLC. They would still have had control by creating supervoting shares or something along those lines.

At least then the public shareholders would own a direct stake in the operating entity. But it is typical of the way private equity owners think of “carve-out” deals like this. They serve mainly to benefit the private equity owners and provide a value for their majority shares.

Unimpressive Financials

The good news is that the company’s revenue is incrementally higher for the half-year to the end of June. For example, it made $2.635 billion in sales during 2019. By the end of June, it was $1.4 billion. Therefore, on a run-rate basis of $2.8 billion, it is up 6.3% over last year.

However, the company showed losses of $236 million in 2019. That is not very impressive for a technology company that has been private for a long time — ever since 2011.

On the other hand, it was able to pull out a small profit for the first half of 2020 of $31 million. However, that works out to a really low net income margin of just 2.2%. That simply is not impressive for a software-based technology company that is just going public.

Nevertheless, the company had positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2019. It made $799 million in all of 2019, and during the first half of 2020 EBITDA was $507 million. Therefore, its run-rate EBITDA for 2020 is $1.014 billion, or 26.9% above last year.

If the company can continue with these numbers, maybe MCFE stock has a chance of moving up.

What To Do With MCFE Stock

Given that the company is newly public there are almost no analyst ratings on MCFE stock. However, two Seeking Alpha authors wrote up the company recently in articles that are accessible ahead of their paywall.

The headline on one article pretty much says it all: “McAfee IPO: Not Worth the Limited Upside.” The other article is also fairly negative on the stock, especially on its technology products.

Given the company’s confusing structure, its carve-out nature, and its weak financials, I think MCFE stock is probably a pass for most serious investors. There’s basically no bargain element here.

It might be better to wait for several quarters to find out how well the company is really operating. It will also help clarify how the private equity owners of the company are thinking of providing value to shareholders in this mediocre offering.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

Article printed from InvestorPlace Media,

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