NEW YORK (The Deal) -- Although CDK Global (CDK - Get Report) is receiving sponsor interest as the auto dealership software market heats up, the company will prove to be a more challenging leverage buyout than its peer Solera Holdings (SLH), which has a $6.5 billion buyout pendinge, according to industry sources.
Hoffman Estates, Ill.-based CDK Global is catching the attention of the same group of private equity firms that took a look at Solera, two sources familiar with the situation said. Automobile insurance software maker Solera announced Sept. 14 it had agreed to be taken private by Vista Equity Partners for approximately $6.5 billion.
The Deal reported then that private equity firms Blackstone Group (BX - Get Report), Silver Lake Partners, Hellman & Friedman and Thoma Bravo were among suitors vying for the Westlake, Texas-based Solera, with Vista Equity and Thoma Bravo duking it out in the final stretch of the sale process.
While the same group of buyout firms are looking at CDK, the company could be a difficult LBO given its slower growth and lower Ebitda margin, which stems from its mix of business and spinoff just a year ago, industry sources suggested.
CDK Global, which currently has $2.1 billion in revenue, is estimated to generate $791.6 million in gross profit, giving it a 38.3% gross profit margin and $435.1 million in Ebitda with a 21.1% Ebitda margin this year, according to Bloomberg data. CDK has $984.1 million in debt.
With $1.1 billion in revenue, Solera produces $855.2 million in gross profit, giving it a 75% gross margin, and $421.1 million in Ebitda, giving it a 36.9% Ebitda margin. Solera has $2.5 billion in debt, according to Bloomberg data.
Because CDK is a much lower margin business, "implied multiples are much, much higher," the source explained. Another source familiar with the situation noted that the company is also growing more slowly than Solera Holdings.
"There are few people who can write the check," the source said of the target's potential suitors.
Founded in 1972, CDK Global was formerly the dealer services unit of Automatic Data Processing (ADP - Get Report) and was spun off last October. Shares of the company are up about 64% since then, trading at $50.80 a piece midday Wednesday with a $8.1 billion market capitalization.
Today, CDK is organized into two main units: automotive retail and digital marketing. The former makes solutions that help automotive retailers manage the sale, financing, insurance and repair of vehicles, while the latter provides digital marketing and advertising offerings, which are less profitable than technology-based offerings.
Still, CDK Global could garner a price tag of $55 per share to $60 per share in a sale, explained Gary Prestopino, managing director at Barrington Research Associates, adding that at $60 per share, CDK Global would be fetching a multiple of 15 times its estimated Ebitda for 2016.
Based on the 160.76 million outstanding shares of CDK, the price tag would come to between $8.8 billion and $9.6 billion.
If the sale came to fruition, it would be one of the largest go-private transactions this year, in line with a $9.1 billion offer from the management of Qihoo 360 Technology (QIHU) to take the China-based company private and Lone Star Global Acquisitions' $6.9 billion check for Home Properties (HME).
CDK Global announced in June its long-term plan to increase earnings and revenue growth that would generate additional Ebitda of $250 million to $275 million over the next three fiscal years, in addition to 35% in Ebitda margin for fiscal 2018.
Barrington Research's Prestopino said CDK would have to go through restructuring efforts to achieve 35% in Ebitda margin, adding that it could be better for the target to focus on that out of the public eye.
"Once you get all the pieces turned, you can take it public again sometime down the road," he said, adding that CDK is a good business with good visibility and steady growth.
Makers of software serving the auto industry have enjoyed a rapid pace of M&A this year, as evidenced not only by Vista Equity's nearly $7 billion offer for Solera but also by Cox Automotive's planned $4 billion purchase of Dealertrack Technologies (TRAK). Cox's offer is set to expire Sept. 30.
Bloomberg reported earlier in September that CDK Global, which is working with Morgan Stanley, is receiving expressions of interest from select PE firms and that H&F and Blackstone are among a small group of PE firms that have been allowed to review the company's financial details.
Meanwhile, information analytics and services provider IHS (IHS) is exploring a potential counteroffer for Solera Holdings, Bloomberg reported this week. Officials with CDK, Thoma Bravo and Carlyle did not respond to requests for comment Wednesday. Those with Morgan Stanley, Blackstone, H&F and Silver Lake declined to comment.