Potential Higher Offer – 19%-25% Upside
This idea was shared by Jim.
SoftwareONE is a Swiss-listed CHF2.9bn market cap value-added reseller of software (e.g. Microsoft’s, Adobe’s, and other products) that also provides related software management, infrastructure, and development services. In recent months, SoftwareONE received two non-binding proposals from Bain Capital – CHF18.50/share in June, raised to CHF19.50-20.50/share a month later. SWON currently trades at CHF18/share, just below the initial bid. Both bids were rejected as undervaluing the company, however, there are several interesting aspects suggesting that the buyout saga is not over yet.
- Concurrently with the rejection of a second bid, SWON launched a strategic review and said it is “open to proactively discuss options that substantially reflect the fundamental value of the Company, including with Bain Capital”. This week with Q2 results the company confirmed that the review is ongoing.
- The sale is supported by three SWON’s founders, who own a combined 29% stake, and who have backed both proposals from Bain Capital. Media reports suggest that the founders are looking to roll a significant part of their stake. The founders used to lead the company before two of them stepped down from the board a few years ago, whereas the third one resigned from the chairman’s role this April but still remains on the board.
- A comparison of SWON to its peers suggests sufficient room for an improved bid. Bain’s recent offer at CHF19.50-20.50/share valued SWON at 11.0x-11.3x TTM EBITDA. The most comparable public peer is Crayon Group, a smaller value-added software reseller, which commands a multiple of 12.1x. Despite similar geographic exposure, Crayon Group has maintained lower EBITDA margins over the last few years compared to SWON (16%-20% vs. 23-24%). Other less comparable peers, including Bechtle, CDW, and Softcat, are valued at TTM EBITDA multiples of 11.9x, 14.1x, and 19.6x. These peers rely more heavily on cyclical hardware sales and exhibit notably lower EBITDA margins (6%, 10%, and 14% respectively). At 12x-13x multiple, SWON could be worth CHF21.50-22.5/share, or a 19%-25% upside from the current prices.
- Bain is a very reputable financial buyer with a number of successful acquisitions/investments in the IT services space. It also has a track record of improving its own bids, including for Estia Health (A$3/share >> A$3.2/share), Stada (€58/share >> €66/share >> €66.25/share >> €74.40/share), Kosaido (¥610/share >> ¥700/share), Caverion (€7/share >> €8/share >> €8.50/share), etc. Bain Capital was also recently involved in the bidding war for another European software company Software AG before losing it to Silver Lake.
The remaining timeline is likely to be short. Bain’s second offer followed the first bid after just one month. Currently, one month has already passed since the latest proposal. If the whole thesis fails and the company remains unsold, the downside to pre-announcement levels stands at c. 20%. However, I do not think shares will sell-off by that much, given the keen interest from Bain and rumors that the founders were not willing to exit at these prices, but chose to roll over most of their stake.
SoftwareONE generates its revenues from two segments – Marketplace (encompasses software licensing from a number of vendors) and Services (cloud infrastructure services, cloud-native application development, etc.). SWON is Microsoft Azure’s largest partner globally. The company generates the majority of its revenues in the EMEA region (56%), followed by the Americas (26%) and APAC (12%). The vast majority of the company’s revenues are recurring. Over the past few years, SWON has achieved an annual organic topline growth rate of c. 10%. In FY21-22, the company boasted contribution and EBITDA margins of 63-65% and 24% respectively. Cash conversion is solid with operating cash flow at CHF 91m and CHF 158m in 2022 and 2021 (vs CHF 240m and CHF 219m in adjusted EBITDA). Double-digit topline growth and 24-25% adjusted EBITDA margins have been guided for 2023. The company has 16% of its market cap in net cash. More background on the company can be found in this VIC pitch.
One of SWON’s original shareholders, Daniel von Stockar (11% stake) served as the company’s chairman from 2013 to 2023 and currently maintains a position on the board. The two other founding shareholders are Beat Curti (10%) and Rene Gilli (8%). Both Curti and Gilli have stepped down from their board positions. The company’s management team excluding von Stockar owns 2%. The rest of SWON’s shareholder base includes UBS Fund Management (5%) and Pictet Asset Management (5%).
This idea is interesting, thank you.
What is your expected value given the probabilities of various outcomes?
Thanks
Thanks. I almost never do this exercise, especially with such situations, where the upside/downside are not even precisely clear. However, I like the setup and think there’s a good chance that either Bain will come back or another bidder will appear. Given the founders’ support and comps valuation, I don’t think that a very material bump is needed above Bain’s last bid to seal the deal.
DT, what don’t you like about this one? Too large to be confident that it is mispriced?
I am trying to understand why ASB.ASX was worthy or portfolio inclusion but an idea such as this is not.
https://www.reuters.com/markets/deals/softwareone-gets-round-bids-strategic-review-sources-2023-10-13/
No comments after Bain rejection?
SWON has officially rejected Bain acquisition offer and wrapped up its strategic review process. With no other potential bidders emerging, it appears that the special situation angle has faded, leaving this mainly as a valuation case now. Previously, Apax Partners withdrew from the bidding process leaving Bain as the sole remaining bidder. Following due diligence, Bain’s final offer of CHF18.80/share fell short of its previous non-binding bid range of CHF19.50-20.50/share. This suggests that the DD was maybe not as exciting as had been anticipated. This further reduces the likelihood of a new bidder emerging with a substantially higher offer that would meet the board’s expectations.
Currently, SWON’s stock trades around 8x TTM EBITDA. The company is scheduled to release its full-year results and host a capital markets day on February 15, during which medium-term guidance will be provided.
Anyone knows why this process and outcome look poorly to shareholders? First, the offer was lowered. Secondly, haven’t seen any competitive bids (odd for an auction). Thirdly, the process concluded without any successful bid. Either operating performance and/or outlook have materially worsened or the major SHs were not a seller in the first place it appears.
SWON’s takeover saga continues. The three founders, who previously expressed their support for Bain’s rejected 18.8 CHF/share offer, are now calling for an Extraordinary General Meeting (EGM) to elect a new board and revive the privatization bid.
“We’re confident we’ll reach the 50% threshold,” one of the founders stated regarding replacing SoftwareOne’s board. “We have received indications of support from other top ten shareholders who share our frustration and endorse going private.”
Reuters reports that Bain continues discussions with the founders and remains interested in a potential deal.
The EGM is scheduled to coincide with the Annual General Meeting (AGM) on April 18. In the interim, the company is set to announce its full-year results and host a capital markets day on February 15th.
The spread to Bain’s 18.8 CHF/share offer has narrowed from 28% (right after the strategic review conclusion) to 9%.
https://www.marketscreener.com/quote/stock/SOFTWAREONE-HOLDING-AG-72370735/news/SoftwareOne-to-combine-the-requested-EGM-with-the-upcoming-AGM-45929254/
https://www.reuters.com/technology/softwareone-founding-shareholders-seek-elect-new-board-2024-02-05
In mid-February, SWON reported its Q4’23 results and held a capital markets day. The business continues to display solid operational performance, with revenues and EBITDA up 7% and 14% respectively year-over-year in Q4’23, (in constant currency). SWON unveiled new medium-term operational targets (’Vision 2026’). Management did not provide any comments on the recent developments nor the upcoming EGM where the shareholder group led by the three founders will seek to oust the current management. The AGM/EGM has been scheduled for April 18. The spread to Bain’s CHF 18.8/share bid currently stands at 13.5%.
https://sc102-prod-cd.azurewebsites.net/-/media/files/releases/swon-20240215-softwareone-fy2023-results-cmd-en.pdf?sc_lang=en&hash=3115DA17FB75BE15C415EAE2C95FEE74
is the bid not withdrawn? why did the “auction” not attract more, and more importantly, higher offers? it does not add up.
The initial bid fell through, but three founders are moving to oust the management and pursue the sale anyway. There are even rumors Bain is still interested, which means a renewed offer could be on the table if the founders win this proxy fight.
Regarding the auction, as I understand, management wasn’t obliged to disclose full details, so it’s unclear if there were other offers or if the whole thing was just a show and they never had any intentions to sell anyway. Whatever the case, the activism from the founders and Bain’s continued interest (reportedly) are positive signs.
Jimo – anything worth updating with board vote/changes?
Any update?
Apologies for the late update. As anticipated, the founders won significant control and ousted most of the board. Three founders have gained board seats, with one now serving as chairman. However, the situation is less appealing than initially thought. Bloomberg has reported that Bain is no longer considering the bid. Meanwhile, comments from the new management seem extremely vague. The new chair stated that the company is “open to any bidders,” but there are currently no ongoing discussions. And then on top of that, he emphasized that management’s primary focus will now be on operations.
Not really sure what to think, yet it seems that this “shift” and the reported withdrawal by Bain make the prospect of a strategic review or a sale less likely… though maybe not entirely off the table. The company remains cheap and some speculations (in the media) about SWON eventually becoming a takeover target remain. I’ll keep an eye on developments but have sold a larger portion of my stake over the past week.
https://www.bloomberg.com/news/articles/2024-04-19/softwareone-shares-rise-on-board-ouster
https://www.marketscreener.com/quote/stock/SOFTWAREONE-HOLDING-AG-72370735/news/SoftwareOne-seen-as-takeover-target-after-board-shake-up-shares-rise-46480538/
https://www.reuters.com/markets/deals/apax-bain-cvc-exploring-potential-bids-softwareone-sources-say-2024-07-17/
The takeover of SoftwareONE seems to be back on the table.
A quick recap. SWON is a value-added reseller of software from Microsoft, Adobe and others. Last year, the company received multiple bids from Bain Capital. The offers went as high as CHF19.5-20.5/share with the final bid ultimately settling at CHF18.8 (versus CHF17.5 currently). All offers were deemed too low and were rejected by SWON’s previous management team. The company’s founders, who own a combined 29% stake and had supported the takeover interest, overhauled the board this April. It seemed like SWON was poised for a quick sale. However, shortly after board’s reshuffle, rumors emerged that Bain was no longer interested. Management confirmed there were no ongoing discussions with any bidders at the time but noted that SWON was still open to a sale. In May, during the Q1 earnings update, management unveiled that multiple suitors had approached the company again.
This week, Reuters reported that Bain has returned and is exploring a potential bid for SWON. PE firms Apax Partners and CVC are also looking into the company. Last year, Apax Partners was rumored to be among the potential suitors but later withdrew. Such comebacks are a bit unusual, but could be partially explained by the fact that SWON’s new management and founders clearly want to sell the company and are likely putting significant effort into shopping it. Additionally, the stock seems relatively inexpensive. SWON trades at 10x TTM adj. EBITDA, while the most comparable public peer, Crayon Group (larger but with lower margins), trades at 13.4x.
I think SWON is a timely idea. The firm is very likely to get sold given the interest of 3 parties and the fact that SWON went through a whole board reshuffle just to make sure the revamped board votes for the takeover this time.
The only question is for which price? The lowest point from last time (18.8 CHF) delivers 9% upside (currently 17.28 CHF), in a bidding war hopefully more. Is there a reason for the bidders to demand less? I follow earnings revisions on Bloomberg and they look stable compared to 6 months ago. Hence, little reason from that point of view. Valuation is attractive. I would also include Bytes and Softcat in the UK. Both trade at 15-18x EV/EBITDA vs. 10x for SWON. Admittedly, both are well-run firms which is not the case for SWON.
Still to me it looks like SWON is a classical “Heads I win, tails I do not lose much”
CHF and EUR Interest rates are trending lower and financing conditions are much better than last year, so PE firms are willing to bid more aggressively, all other things being equal.
Market valuation is more or less the same vs. last year for small & mid cap companies like SWON, despite the rising S&P500/NASDAQ indices driven almost entirely by a few mega-cap names at the top. So we won’t expect an uplift in comp. multiples.
I think we need to understand more about SWON’s fundamentals, i.e., the “all other things” part.
If there isn’t significant deterioration identified, then this is really a very attractive asymmetric situation.
Earnings revisions have impacted the multiple and on a NTM basis the shares trade on 17x PE today. When Bain made the offer to acquire SWON back in June 2023 this implied a 14x NTM PE. SWON trades at 17x PE today. This is because NTM earnings estimates have fallen. So if Bain wants to pay CHF 18.80 they will have to push up the valuation to 19-20x earnings (just to hit their prior offer) which feels pricey. Whilst there are multiple bidders I think the fact that CHF 19.50-20.050 was floated but settled at CHF 18.80 reveals more about the quality of SWON’s business under the hood. Fundamentally I think SWON is a short but with a merger arb hat I can’t see why this deal doesn’t go through since the founders have elected a new board that are aligned with the founders and want to push through a take-private. Only question for me is the price.
SWON is not a comp with the majority of the names mentioned here so far other than Bytes (both of which only sell software and services) since many are hardware-focused and hold inventory etc so margins are not comparable.
After reading what you said, I think this sound like an asymmetric short opportunity, with downside (for shorts ) capped at about 10% (at CHF 18.8).
If Bain makes a new bid, I think the old price of CHF 18.8 will be the most likely price point that both sides can agree on. Bain will pay a higher multiple (but offset by higher leverage and lower financing costs), and founders will feel psychologically that they have recaptured the once lost opportunity.
If Bain and others poke around and again decide not to bid, stock price will likely collapse.
I’ve been following the deal. Looks like a potential merger between Crayon and SWON with APAX taking both private. Pretty weird turn of events. Seems Bain no longer front runner, with APAX taking the lead now. I’ve got more conviction in my prior analysis that Bain weren’t able to put up an offer acceptable to the Board (imagine it would be lower since SWON downgraded FY guidance in H1). Also interesting that SWON’s share price did not rise following the news buy Crayon jumped 19%. I think the deal gets done, but big risk over price now.
How would this three-way merger work between SWON, Crayon, and APAX?
Will both SWON and Crayon be delisted, or will one of them remain listed (likely SWON being the surviving entity)?
Will SWON acquire Crayon with a stock swap, and then after APAX becomes a substantial shareholder of SWON makes a buy-out offer?
Or will APAX make separate offers to SWON and Crayon, merge them after taking both private, and allow SWON’s founders to roll over their equity into the combined entity?
Difficult to say from just a couple of BBG articles. Given SWON founders want to see the company in private hands I can see this going one of two ways: 1) SWON merges with Crayon and APAX makes a buy out for the combined entity 2) APAX puts in an offer to acquire both separately on then merges. FWIW I think the first option is most likely however I take no view either way. I imagine SWON were not happy with the price they received on a standalone basis and therefore have pushed for the Crayon deal as a way to try and eek out a premium through “synergies” of the combined entity.
It’s very strange that SWON came up with the idea of acquiring Crayon.
Normally, an acquisition is used as kind of a “poison pill” to fend off one’s own potential acquirers, but here I believe SWON’s founders are clearly open to being acquired.
The stock plummeted roughly 40% after its latest trading update. The drop followed a lowered guidance and dimmed business outlook, even as privatization discussions continue. Management described the potential sale talks as “challenging given the general business environment.”
Revenue growth guidance was cut from 7-9% to 2-5%, and the adjusted EBITDA margin target was revised down to 21-23% from the previous 24.5-25.5%. This performance downgrade was attributed to adjustments in vendor incentives, sales execution challenges from a recent go-to-market shift, and a more cautious spending climate.
Down nearly 38% on bad new today..
Did they kitchen sink it for the PE/ Rollover buyers ?
https://www.marketwatch.com/story/softwareone-shares-rise-on-potential-going-private-deal-5b019b9a?mod=newsviewer_click
I don’t know. It’s a minor change from the previous language. I don’t see anything very positive about it.
“The Board of Directors reiterates that discussions led by the Transaction Committee with interested parties regarding a potential going-private transaction are progressing, but remain challenging given the general business environment.
The Board intends to present an attractive offer to shareholders or conclude discussions by February 2025, in conjunction with FY2024 results.”
That “attractive offer or conclude discussions” part more like suggests that the interest they’ve received so far probably didn’t meet expectations.
SWON confirmed it’s in “advanced discussions” to buy Crayon Group in a cash-and-stock deal. Looks like this might be step one of the previously rumored plan where Apax eventually grabs both companies. SWON dropped 14% after the news. This is getting messy – hard to see what kind of upside the endgame could even offer now.
Definitive agreement reached: Crayon to be acquired by SoftwareOne. Shareholders will receive 0.8233 new SWON shares and NOK 69 in cash per Crayon share. Current spread is ~5%, with completion expected by Q3 2025.
https://www.softwareone.com/-/media/files/releases/swon-20241219-softwareone-crayon-en.pdf?sc_lang=en&hash=1F1B68F61AE7D3C041E3189D764AC6A9
Yeah, I think the idea’s kinda flopped at this point. The merger isn’t closing until Q3 2025, and there’s no clear timeline for when, or if, Apex will acquire the combined company. So the buyout angle is pretty much off the table or delayed, and now it’s just a valuation play on the pro-forma combined company. This one turned out pretty bad, sorry to everyone who got involved.