When Quintiles goes public, founder and Chairman Dennis Gillings and the private equity firms who together own the vast majority of the company stand to gain $25 million straight away without even selling a single share of their Quintiles stock.

Quintiles will pay this group of investors, including Gillings and his family, a one-time “termination fee.” The Durham pharmaceutical services provider disclosed the planned payment when the company first filed its IPO in February. But the total amount of that fee was not stated at that time.

In an updated filing Tuesday, Quintiles revealed those investors will be paid $25 million when the IPO is completed. This arrangement comes as part of a January 2008 agreement, when a syndicate of private equity firms bought stakes in Quintiles. The termination fee that is due comes on top of payments to these investors for “management services” to the tune of $5 million a year, indexed for inflation.

Management services agreement

In the agreement, the Gillings family stake is represented by GF Management Company, which is controlled by Dennis Gillings. According to filings, Gillings and his family hold a 23.7 percent stake in Quintiles. The other Quintiles shareholders covered under the management services agreement are Bain Capital Partners, TPG Capital, 3i Corporation, Cassia Fund Management and Aisling Capital. Aisling receives $150,000 annually for management services. The remaining part of the management fee, about $4.9 million, is split proportionally among the other investors depending on the size of their Quintiles stake. That arrangement suggests the $25 million termination fee will be split among Gillings and the private equity investors the same way.

The updated Quintiles filing does not yet say how many shares the company plans to sell, nor does it give a targeted share price. Those details will come in future filings. But the filings do show that ownership in Quintiles pays beyond the management fees issued to its private equity investors.

In 2010, Quintiles paid $67.5 million in dividends, according to the updated registration statement. Shareholders that year earned 58 cents for each Quintiles share they owned. The dividends got better. In 2011, Quintiles paid $288.3 million in dividends, or $2.48 per share. Last year, Quintiles paid $567.9 million in dividends. Shareholders of record in February 2012 received a $2.82 dividend. In October, Quintiles’ board declared another dividend amounting to $2.09 per share.

Quintiles is doing very well as a company. The company reported $4.8 billion in total revenue in 2012 making it the largest of the contract research organizations who run clinical trials and provide other services to pharma companies. The 2012 revenue figure is a 12 percent increase compared to 2011 results.

Debt-financed dividends

But Quintiles is financing these dividends largely by taking on debt. In 2011, the company reached a credit agreement allowing the company to borrow up $2.2 billion. At the time Quintiles announced the new credit facility, the company said the proceeds would be used to refinance existing debt. But in the updated registration statement, Quintiles further explains that the loan as well as cash on hand paid for the $288.3 million in dividends paid to shareholders that year. The money was also used to “pay a bonus to certain option holders totaling approximately $11.0 million,” according to the filing. Quintiles repaid the loan with proceeds from a new loan with better interest rates.

In February 2012, Quintiles secured a $300 million loan from a syndicate of banks. The loan is due in 2017. The loan along with company cash was used to pay $326.1 million in dividends paid in March 2012, according to the filing. Unnamed option holders were paid a bonus of $8.9 million.

After Quintiles obtained a term loan in December to refinance an existing term loan, Standard & Poors in a report described the company as having an “aggressive” financial policy, exemplified by the two debt-financed dividends in 2012. S&P expects that Quintiles’ debt leverage, the amount of debt the company has to finance its assets compared to its equity, will decrease as the company’s earnings grow. The ratings agency said it could raise its rating on Quintiles if the company spends its cash on paying down its debt and reducing its leverage. But S&P expects Quintiles to continue directing its cash toward dividends.

Quintiles has paid $1.5 billion in cash dividends since 2008, according to the company’s IPO filing. While Quintiles has taken steps to financially reward company shareholders prospective investors looking to get a piece of the company in the IPO should not expect the same generosity. Quintiles also said in its filing that it doesn’t plan on paying regular cash dividends to shareholders after going public.