- Magnet is Continuing to Justify the Transaction Based on Outdated, Misleading Information
- Four Software Takeovers at Higher Premiums Since Magnet's Takeover Announcement
- Nellore Urges Shareholders to Follow Leading Independent Proxy Advisor Glass Lewis' Recommendation AGAINST, Comments on ISS
- Nellore Suggests Shareholders Read Recent Notes From Brokers Quoted by Magnet
Ending Where We Started: Magnet is a Special Business Creating Continued Shareholder Wealth
Magnet's operating and financial model are such that roughly every 4 years, revenue converts into free cash flow ("FCF"). For instance, the company generated US$27mmof revenue in 2018 and generated US$33mmof FCF in 2022. The company generated US$50mmof revenue in 2020, and per Management Forecast, expects US$65mmof FCF in 2024. The company is expected to generate the equivalent of 2022 revenue, US$99mm, in 2026 FCF ->a compounding machine! Thus, one could pay up to 20x 2023 revenue (>100% above current offer price), and still earn a double digit return over 4 years.
Materiality of Q4 FCF on Realizing Fair Value
It seems like Magnet (and its Special Committee) are either not aware of, or don't appreciate, how FCF can drive returns for the buyer. Consider that by waiting for
EV / LTM FCF
This is especially significant because the last twelve months have been especially punitive toward high growth, technology companies. Yet, here we are with an offer price that is below the average in that punitive period. Applying the unaffected average of 43x on LTM FCF post Q4 results and
Further, using the same methodology Magnet uses on slide 3 of today's presentation to justify the transaction, we can see that not only is Magnet not trading at 56x estimated 2023 FCF, it is trading at just 38x twelve months trailing FCF and well below the peers:
EV / LTM Free Cash Flow
Not only is there no control premium here, Magnet consideration is not even at the level of transaction unaffected, slower growing, lower margin public comps. Applying the median multiple of peer group results in a stock price of
Four Software Takeovers at Higher Premiums
Since the Magnet transaction was announced on
Notably, three of the takeovers were announced just this week, highlighting the underlying demand for recurring revenue and software business models even in the face of
Unaffected Premia | |||||||||
Date | Target | Acquiror | Deal Value | Rule | 1-Day | 30-day | |||
Sumo Logic | 1.7bn | 15 % | 57 % | 50 % | |||||
Post SVB / SBNY: | |||||||||
Momentive | STG | 1.5bn | 10 % | 46 % | 51 % | ||||
Qualtrics | 12.5bn | 33 % | 62 % | 73 % | |||||
Cvent | 4.6bn | 28 % | 29 % | 54 % | |||||
Mean | 22 % | 49 % | 57 % | ||||||
Median | 22 % | 52 % | 53 % | ||||||
1.4bn | 74 % | 15 % | 12 % | ||||||
Moreover, high growth, high quality software companies Kinaxis and Docebo have both reported strong earnings in the last two weeks and are both trading above their pre-earnings reports. Cellebrite is also trading up 15% since its strong Q4 report.
Don't fall for Magnet's downside risk scare tactic. To the contrary, Nellore believes the stock will start to price in
Comments on ISS
We believe even the cautionary support recommendation from ISS is not warranted. We can just agree to disagree about the significance of
Valuation methodologies:
- ISS claimed "it is not illogical or unprecedented to think about software transactions through a FCF multiple lens, and such an approach would likely ascribe a higher intrinsic value to MAGT. However, there is not enough evidence to conclude that the valuation supporting this transaction was not credible"; The facts below indicate that the supporting valuation is not credible
- We believe that you do not HAVE to use FCF multiples as a valuation methodology, but methodologies based on other financial metrics, especially revenue, require more careful consideration of growth, margin, and quality characteristics in the reference range
- As Glass Lewis points out, the issue is not the methodology chosen but the "the multiples applied by MS here are substantially misaligned with the Company's stand-alone trading patterns (e.g. application of 2.5x and 4.5x 2023 revenue multiples, despite the Company's average NTM revenue multiple of 7.0x in the one-year prior to announcement and while trading at NTM revenue multiple of 8.9x on market close the day prior to announcement; we see similar discrepancies with respect to NTM EBITDA)."
- ISS specifically points to Datto's fairness opinion as lacking FCF-based valuation methodologies. That is true but they use an EBITDA range of "16.0x – 30.0x" and highlight "unaffected EBITDA Multiple for Datto was 23.2x"
- If Datto deserves 16-30x for a 20% revenue grower and the unaffected multiple was 23.2x, then how about Magnet? Magnet's reference range is 22.5x – 27.5x for a 35% grower and the unaffected multiple prior to announcement was 42.0x, 53% above the high end of the range.
- Similarly, the "unaffected Revenue Multiple for Datto was 5.4x based on the Analyst Projections" and the financial advisor's range for Datto's fairness opinion was "4.5x to 7.5x."
- Again, Magnet is a 35% grower versus 20% for Datto and only gets 2.5 – 4.5x, while the unaffected multiple is 8.9x.
- Lastly, we believe Independent Valuator's otherwise pristine DCF analysis is also flawed by a poor terminal value assumption, which again doesn't jive with reality: "considered the implied terminal enterprise value to LTM revenue multiple, which ranged from 2.1x to 3.0x, and the implied terminal value to LTM EBITDA multiple, which ranged from 7.5x to 10.6x"
- In the end, we just believe that it is easiest to look at FCF, since Magnet consistently produces it, but we are open to the appropriate Revenue and EBITDA multiples, as long as they are adjusted for growth rates, margins and cash flow generation
Standalone Path:
- Worth repeating that only 60% of Magnet's business concerns Public Safety, Grayshift is not relevant to the Private Sector business.
- Within the Public Safety business, the vast majority of customers REQUIRE dual sourcing or triple sourcing extraction vendors. CEO says so himself on
08.02.22 at the CG conference - It has been over 8 months since Magnet lost Grayshift to
Thoma Bravo and changed their friendlier GTM partnership structure, Magnet has reported two of its strongest quarters ever - Further, Cellebrite is also available as a mobile extraction M&A target, and is available at a similar enterprise value as Grayshift. Lastly, Grayshift has a heavy debt load and has a very small revenue base – are they really going to pose a threat to Magnet's
Artifact Library ? I thinkThoma Bravo /Grayshift needs Magnet more than Magnet needs Grayshift
Share Price Volatility:
- ISS claims "Magnet share price was volatile and lost ground in late 2021 and early 2022 – Magnet fell 76.4 percent from its all-time high to its all-time low closing price (
Aug. 31, 2021 toJune 16, 2022 )" - Nellore considers that period in July to
September 2021 to be driven by non-fundamental buying in a very tight float, immediately post IPO. The Board agrees given their call out of the "No News " press release released on08/31/21 on Slide 12 of theFebruary 10 th presentation - Thus we believe that ISS should only consider the period of trading following Magnet's secondary transaction on
December 14, 2021 . Abiding by this ourselves, we start our EV/LTM FCF analysis starting onJanuary 1, 2022
Comments on Research Analyst Commentary
The tone of the analyst community has moved significantly toward our favor since our initial press release on
- RBC,
March 9 th: "Solid Q4 adds fuel to the takeout debate" "Strong results reaffirm that purchase price too low for investors." - CG,
March 9 th: "Outstanding Q4 ahead of theMarch 23 vote" "Q4 results were outstanding again and would normally have led to a big jump in the shares if this was still trading on fundamentals." - NBF,
March 9 th: "standard beat from Magnet and given the Company is in the process of a takeover, the only thing the results would do is to add further uncertainty to the shareholder vote"
Nellore Capital Signing Off: Protect Your Interest, Vote AGAINST
Nellore is the only party that is 100% aligned with its fellow SV shareholders. We are sincerely trying to present the facts as they are and attain full value for all of our Magnet shares.
Nellore continues to urge shareholders to use to GOLD proxy to vote AGAINST the proposed takeover.
If you have already voted another proxy, you can still vote the GOLD proxy AGAINST the takeover. Only the later-dated vote will be counted. The voting deadline for the GOLD proxy is
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1 Based on closing stock prices as of |
2 In good conscience, we couldn't bring ourselves to include |
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