What Dropbox's New Credit Line Means For Prospect Of An IPO

Among a few tech companies speculated to be readying for an IPO is Dropbox. The software-as-a-service, or SaaS company, offers cloud storage, file synchronization, personal cloud and client software.

The News

A Bloomberg report, citing people familiar with the plan, said on Thursday Dropbox is opening a $600 million line of credit facility with six banks, led by JPMorgan Chase & Co. JPM.

The report identified the other participants in the debt facility as Bank of America Corp BAC, Deutsche Bank AG (USA) DB, Goldman Sachs Group Inc GS, Royal Bank of Canada RY and Macquarie Group Ltd (ADR) MQBKY. The line of credit is expected to close by Monday.

Line Of Credit

A line of credit is an agreement between a bank and its customer that sets the maximum amount a customer is eligible to borrow. The terms also allow the borrower to access credit from the facility at any time, provided it does not overshoot the maximum limit set and as long as the borrower adheres to the conditions laid down by the agreement.

The advantage a line of credit offers is the flexibility it offers — borrowers can make use of funds in line with their needs, with interest due only on the utilized amount and not the maximum eligible amount. The line of credit also allows flexibility with repayment.

Dropbox's Plan To Tap Public Market

Having set up shop in 2007, the company capitalized on the need to store photos and files in the cloud. The company was valued at $10 billion in 2014, when it availed of a $500 million line of credit.

A MIT Technology Review article, quoting people familiar with the company's finances said currently Dropbox's sales might be running at a pace of over $750 per year, up about 88 percent from the $400 million in 2014, with the rapid growth attributed to higher sales of Dropbox Business.

Despite investing heavily in engineering, sales and IT infrastructure, the company has been cash flow positive since early 2016, the report said. The company has about 500 million users as of March 2016.

It was Bloomberg that broke out the news concerning Dropbox' purported interest in getting its shares listed. The company reportedly met advisers in August 2016 to get a hang on the valuation its shares could fetch in the eventuality of a public offering. It was speculated then the IPO could happen as early as 2017.

Box Inc BOX, a rival file-sharing company, had fared badly after its IPO in January 2015. After listing at $20.20, up 44 percent from the IPO price of $14, the stock closed the session at $23.23, a gain of 66 percent. Subsequently, the stock went downhill, hitting a low of $9.12 in February 2016 before making a comeback. It is yet to reclaim its post-IPO highs.

The recent Bloomberg report said, citing people familiar with the matter, discussions are ongoing with advisers, with the advisers suggesting that an IPO could materialize toward the end of 2017.

Need for Funds Ahead Of IPO

The company reportedly sees the new line of credit as offering financial flexibility ahead of the IPO. The company's interest in availing a new line of credit facility was due to the fact that it got better credit terms than what was provided by the existing line of credit.

From the perspective of bankers who have extended the line of credit, the relationship with the unicorn tech company could fetch them huge returns. Wonder how? Lenders are usually given priority when underwriters are chosen by companies. They can, therefore, vie for a sizeable chunk of underwriting fees.

Therefore, the new line of credit may not have any bearing on either the timing or the magnitude of the IPO. The company, apparently, might be biding its time. With Snap Inc SNAP shares pulling back after the early pop on listing, Dropbox could be circumspect about the timing of the offering as well as the valuation.

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The Basics of IPOs: Some Things You Should Know ________ Image Credit: By Abozoul - Own work, CC BY-SA 3.0, via Wikimedia Commons