By Peter M. Zollman

The owners of / AutoTrader Group are getting hammered online over the timing of their proposed Initial public offering. Worse than hammered: crushed. With words like “sleazy,” “funny business” and “money grab bag.” And those aren’t just from the usual suspects, the blog-wacks; most of them are from respectable financial columnists.

The furor was started by Dan Primack, a senior editor at Fortune magazine, who noted that the company’s IPO filing said it was not planning to offer dividends “for the foreseeable future,” but that it had just taken out $400 million in loans to pay a dividend to its shareholders. (We reported about the loan in CIR 13.08, on April 23, and earlier on our website.)

Cox Enterprises, Providence Equity Partners and Kleiner Perkins Caufield & Byers, AutoTrader’s owners, took the dividend in April.

At the time, CFO Dallas Clement told the AIM Group in an interview: “[Our shareholders] are looking for return on their investments,” Clement said. “They like dividends because they can use that money for …

other things. We can do it and still be very modestly leveraged.”

He explained the owners had put in cash to help AutoTrader Group make acquisitions and to fuel growth at “We now have the opportunity to pay the owners back with a dividend,” Clement said. “We’re running this business for the long term. …

“Let’s say you bought a house 10 years ago and took out a 30-year loan,” Clement explained. “You’ve paid down a lot of debt on the house, and perhaps you got a bonus at work and used that to pay it down even more. Now the home’s value has appreciated and the house you bought for $1 million is now worth $5 million, though you only owe $200,000 on it. The banks would now be happy to give you money.”

Here’s what Primack wrote about that and the no-immediate-dividends-to-potential-stock-purchasers policy:

AutoTrader blames its pending lack of generosity on creditor agreements that “significantly restrict” the Atlanta-based company from paying out dividends.

Seems reasonable, until you realize that AutoTrader hasn’t always been such a slave to its creditor agreements. Less than three months ago, the company actually amended its credit facilities to permit a $400 million dividend for existing shareholders … . Moreover, the dividend didn’t come from earnings. Instead, the Atlanta-based company increased its long-term debt from around $884 million to nearly $1.3 billion.

In other words: Public shareholders will have to wait for possible dividends, all of which would come from company cash. … Private shareholders, on the other hand, already got a big payout by adding more debt onto the company’s balance sheet.

No wonder certain public market investors have begun taking a much more skeptical look at private equity-backed IPOs…

Yahoo Finance writers Matt Nesto and Jeff Macke also attacked the IPO, in an article headlined: “Didn’t we learn from Facebook? IPO filing shows market is as sleazy as ever.”

“There’s nothing illegal about this, it’s just kind of scummy,” Macke said in the site’s video. “They’ve made it a lesser company and immediately after doing so, they’re pitching it on to the public.”

The $400 million dividend to shareholders increased AutoTrader Group’s long-term debt from $884 million to $1.3 billion.

The Yahoo article goes on in a similar vein. Other comments online included a Street Insider description of the deal as “funny business,” and this one on Dealer Refresh, an auto market site: “All I can say is this looks like a money grab bag. Why in the world …”

Comments among dealers hammering could be the worst of all for the company. Even if it were to pull the IPO (as has done once before), if it’s damaged its reputation among dealers, its primary customers, the problem could be a significant one.

We’ve asked spokesman Lou Laste for comment; no word back yet. But in a reply to Yahoo he noted the company was in a required “quiet period” and could not comment.)



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