Quick Pitch: Magnet Forensics (MAGT.TO)

Expected Higher Offer – TBD Upside

This is a bet on a higher bid after public opposition from an activist investor. Cybersecurity software provider Magnet Forensics is getting acquired by PE group Thoma Bravo. Consideration for minority shareholders stands at C$44.25/share and comes at only a 15% premium to pre-announcement prices. Shares currently sit at the offer price. The merger will require the approval of minority equity holders and the vote is set for March 23.

Three of MAGT’s insiders with a combined 71% stake are rolling over more than half of their shares – 45% of their ownership is getting cashed out at a lower price tag of C$39/share.

The largest minority holder Nellore Capital (owns 11% of minority shares) argues that the merger proposal is opportunistic and low-balled. The activist claims MGTA is worth $60-$70/share and has even created a site dedicated to this campaign. Nellore Capital has also stated that a number of other “sophisticated” shareholders (a further 5% of minority shares) have also expressed intention to block the transaction. That’s already a total of 16% minority votes against the offer.

Thoma Bravo is a serious financial buyer and this takeover also holds a ‘strategic’ aspect to it – the buyer already owns mobile device-focused forensics software provider Grayshift (stake acquired in Jul’22) and wants to merge the two companies after the acquisition given their complementary businesses and opportunities for cross-selling. MAGT previously sought to acquire Grayshift in Sep’21, before the controlling stake was snatched by Thoma Bravo. Nellore claims that Thoma Bravo is planning to re-IPO the combined entity if the current transaction closes. That scenario seems to fit well with the PE group’s playbook.

Proxy disclosures indicate that the special committee has already negotiated the offer price upwards from the initial C$34/share offered in Oct’22 and C$40/share in Dec’22. As the negotiations have taken quite a while and MAGT share price ran up in the meantime, the announced offer came only at a 15% premium to the unaffected price (C$38.5, Jan 19). The activist also highlights this stating it is the lowest premium in Thoma Bravo’s acquisitions performed over the last 14 years while MAGT has been the fastest growing of all the acquired companies by the estimated NTM revenue growth. The risk of Thoma Bravo walking away seems low and there is a decent chance that the buyer will pay up to please any opposing shareholders and ensure the vote passes smoothly.

Even if the merger closes on the current terms, the downside is basically zero. With the vote coming in two weeks, this looks like a free option on an improved offer.

Magnet Forensics has grown at 40% CAGR in 2018-2022 and is expected to continue growing at 30%+ pace. The company is also profitable and has consistently generated positive FCF. The current offer comes at 10x 2023E consensus revenue. The activist argues that this multiple is way too low for a company of MAGT’s caliber relative to recent transactions and peers. The most comparable transaction is Vista Equity’s acquisition of cybersecurity training software provider KnowBe4 at 10.9x NTM revenue. This should be the valuation floor given KNBE’s slower growth and lower gross margins. The activist says that KNBE’s 10.9x multiple MAGT would fetch c. C$50/share, although it’s not entirely clear how Nellore arrives at this target price. It also argues that MGTA should be valued much closer to DOCS, AYDEN and TTD (tech comps with comparable margins), which trade around 30x FCF. That would put MAGT at C$66/share.