5 Top Picks for 2023 – The Billion Dollar Takeout…Talked about many a name on a fundamental basis but I think this one is a little different of an idea I really like into 2023.
That is the great consolidation. After so many names have been blown out down in some cases 80-90% this creates such an opportunity for peers to come in and start to roll some of these businesses up.
I think this is the time, with rates peaking and equity prices looking for a bottom we got the jolt in the arm as we are starting to see a deal or two announced every Monday when we come in to start the week.
With multi-billion Dollar Private Equity funds in Vista Equity Partners, Thoma Bravo & etc. having recently raised and starting to deploy large amounts of capital in the small/mid cap Software space.
Duck Creek - $2.6B Deal Bottomline - $2.6B Deal
Coupa Software – $8B Deal
ForgeRock – $2.3B Deal
UserTesting - $1.3B Deal There is a sweet spot here and an underlying bid in that $2-5B deal range for so many of these private equity players and if the large corporates start to get involved things really starting to get interesting…
Ahead – $1.3B Deal @ 13x EV/EBITDA by Berkshire Hathaway
Sirius Computer Solutions - $2.5B Deal @ 10.5x EV/EBITDA by CDW For the prior three names I laid out the fundamental case but seeing that this one has analysts coverage I am not going to lay it out the same. Here were the prior three;
Premier Health Group of America Inc - $PHA.V https://stockhouse.com/companies/bullboard?symbol=v.pha&postid=35188947 Spark Power Group Inc - $SPG.TO https://stockhouse.com/companies/bullboard?symbol=t.spg&postid=35215084 Sabio Holdings Inc - $SBIO.V https://stockhouse.com/companies/bullboard?symbol=v.sbio&postid=35217591 But instead, we are going to look at these from a capital markets point of view;
Sangoma Technologies - $STC.TO & Converge Technology Solutions - $CTS.TO The Capital Markets Side Both these companies went from stock market darlings to dogs in under twelve months. Both highly acquisitive raised a lot of capital to only to place all those raises deep into the hole within a matter of months.
Now in 2023, something has to give and you have seen it with CTS announcing strategic alternatives late in 2022 when third parties started to sniff around the company to take it out. Followed by the hiring of the two financial advisory teams to evaluate the opportunity.
Then on the other side of the coin you have STC, that continues to get smashed for prior misdeeds and overpaying for Star2Star Acquisition. Which in hindsight looks crazier every day when you look at the price tag >$500M or more than the entire market cap of the blended company as of today.
The pain isn’t done, with so many of those shares hitting the market that will continue to push down on the stock price as more and more become free trading on a installment basis for quite some time. The market just wasn’t & isn’t able to absorb the selling pressure.
That’s how I get the idea that there are so many tired shareholders in the name that I think a lot of them would be willing to hit the bid on a deal if a buyer happened to come along.
They both did the right thing, and started to hammer the buyback as their stocks cratered but the real opportunity comes from a transaction. Especially on a STC I don’t see how the stock recovers trading in the open market in 2023 if you continually have the Star2Star share selling.
Partly, that is what creates the opportunity for a strategic to come get the company as a whole at a discounted price.
On Valuation Both trading similarly around 5-6x EV/EBITDA both down materially from 2021 highs with STC down 80% & CTS down 60% from the high.
Both took advantage of capital markets during the boom time especially CTS with hindsight it is looking clearer by the day that STC overpaid badly at the top for the Star2Star business. Followed by a terrible blunder IMO by STC not pushing through with the NASDAQ share offering.
But fundamentally nothing has really changed with the core operating stories and TAM intact since those highs, was there some seat growth pushed forward due to COVID absolutely, but both with a significant hardware component to their business models which were supply constrained so it was not if they were meaningfully over-earning during that period.
The comp table I look at for the Communication Solutions Vendor Group on the STC side is at a 15-16x EV/EBITDA valuation which I think is very very pricey… but hey, makes a tucking in a business like this highly accretive if you can get it at 8-10x EV/EBITDA.
On the CTS side of the story though I think the upside potential is a little lower even given the margin structure and revenue mix. But you don’t have to look no further than those recent two corporate deals highlighted by Berkshire Hathaway or the Buff dawg seeing value in the space at 13x EV/EBITDA.
That is my point I really want to emphasize, now that many of these stock prices have stopped free falling and Private equity has already started scooping up these businesses, I think some of these public companies will be on the prowl to boost growth on a tough macro environment.
Target Price With all that said where could that get us;
STC – 10-12x EV/EBITDA you would be pushing a 20.00/share target price if you could get to the upper end of the range
CTS – 8-10x EV/EBITDA you would be looking at an 8.00 – 10.00/share takeout price and getting to a sizable 10 figure deal size cheque to be written.
(On a probability basis I think is much much higher given strategic alternatives already announced and bankers hired) Clearly, there is value here but the question will be if/when someone hits the bid. I believe there is a massive snowball effect that could happen here. There is so many tired and dead money in down market cap in tech. You get one deal of size they all will start to find a bid. For example, you get a 2B takeout of CTS a lot of the capital gets cycled back through the small/mid cap tech space and the positive price action could just feed on itself. My guy Jason Donville needs a win ;)
You have already seen the deals start flowing in microcap. Just a matter of time it starts creeping up to these small/mid cap names. LONG