Talking Deal Prices: Siris outbids strategic for Polycom; Angeles Equity keeps PPMs low

  • Siris to pay about 11.2x EBITDA for Polycom
  • Deal trumps Mitel’s cash and stock offer
  • Angeles Equity vows pricing discipline

Cash-flush strategic bidders tend to win auctions over private equity firms for publicly traded companies. But at least one recent exception is the videoconferencing company Polycom Inc.

On July 8, Polycom opted for Siris Capital’s take-private deal of $12.50 a share cash and rejected an earlier cash-and-stock offer from a strategic rival, Mitel Networks Corp, initially valued at $13.68 a share in April.

After the Mitel proposal was announced, however, Mitel shares fell to about $6 from $8, deflating the value of its bid for Polycom as investors frowned on the prospects of the combined company.

“Share prices fluctuate daily and, as such, the value of the Mitel offer also fluctuated,” Laura Graves, vice president of investor relations for Polycom, said in a July 11 email. “Based upon the recent price of Mitel shares, the all-cash offer of $12.50 per share is superior to the Mitel stock plus cash offer.”

Siris won the deal by offering to pay roughly 11.2x Polycom’s projected 2016 EBITDA of $178 million, or about $2 billion including debt, according to estimates from Thomson Reuters. Measured against Polycom’s estimated fiscal 2017 EBITDA of $187 million, the purchase-price multiple is 10.7x. Polycom’s 2015 revenue fell to $1.27 billion from $1.35 billion in the year earlier.

Siris declined to comment further on the deal, but in a statement, the New York buyout shop said the company “fits well with [our] focus on mission-critical telecommunications businesses.”

The Polycom deal contains some interesting caveats, since activist hedge fund Elliott Management Corp owns about 11.8 million common shares of Mitel, or 9.7 percent of its float, while tech-focused buyout shop Francisco Partners holds 8 million, or 6.6 percent, of Mitel shares. Elliott also owns 8.9 million shares, or 6.5 percent of Polycom.

So while Mitel did get bested as a strategic player, it’s got some backing from alternative managers.

Mitel’s share price has jumped to $7 since its buyout bid for Polycom got scrapped, so shareholders seem better off at the moment.

Angeles Equity eyes lower multiples

Timothy Meyer, co-founder and managing partner of Angeles Equity Partners, said the firm paid single-digit purchase-price multiples for its first two portfolio companies, ERP Power and Applied Acoustics, both of which closed this year.

The firm launched in 2014 after co-founders Meyer and Jordan Katz left Gores Group, where they co-led the industrials vertical. Angeles Equity Partners focuses on complex industrial transactions that offer upside through operational improvement.

“We are very focused on our buy-in multiples,” Meyer said in a phone call. “If you look at all the bids we’ve submitted, we average a 5.2x EBITDA multiple. I don’t think we’ve ever bid a double-digit multiple, nor do I think it’s likely in the future.”

In the case of ERP Power, Meyer and Katz crafted a proprietary deal after informally meeting management more than 20 months ago about the electronics space.

While at Gores Group, Meyer had worked in the same business on a complex carve-out of Tyco’s Electronics Power Systems unit. The deal resulted in two portfolio companies, Lineage Power and Vincotech, at the firm.

“It was a conversation to get to know the ERP Power founders and the industry growth drivers — they were not looking to transact,” Meyer said of his initial meeting with the company. “It was a meeting with guys who understood the power electronics space and talked shop. Our conversation culminated in very good chemistry.”

Over time, a deal developed that resulted in Angeles Equity Partners agreeing to buy a controlling interest in ERP Power, with management retaining a substantial equity stake.

“This was a fully proprietary transaction, with no auction process involved,” Meyer said.

Looking ahead, Meyer said Angeles Equity Partners sees literally dozens of add-on opportunities for ERP Power, which designs and manufactures energy-efficient LED driver power electronics for commercial and industrial lighting.

The plan is to build a company with $150 million to $250 million of revenue that would be an attractive asset for a strategic owner, he said.

Along the way, the firm plans to seek out “attractive valuation opportunities,” Meyer said.

Average LBO multiples ease

M&A more or less regained its footing in the second quarter after credit-market volatility that began in 2015 continued earlier this year. GPs complaining about high deal prices finally got a bit of a break to the tune of about 15 basis points.

Average purchase-price multiples for U.S. buyouts dipped to 9.69x EBITDA in the second quarter from 9.84x EBITDA, according to final second-quarter estimates from S&P Capital IQ. Average leverage dipped to 5.29x EBITDA from 5.35x EBITDA.

Again, these are just mathematical averages and actual deal prices may vary.

For example, Thoma Bravo’s July 13 buyout of Imprivata Inc for $544 million amounts to 3.4x the company’s projected 2017 revenue of $161.7 million.

Since the security and identity management company is losing money, it’s hard to put an EBITDA purchase-price multiple on it.

Thoma Bravo isn’t buying a profitable company at this time, but at least Imprivata offers growth, even before the firm works its magic. Analysts have forecast Imprivata to show a slight EBITDA loss in 2017 followed by EBITDA of $10.8 million in 2018.

Action Item: Siris deal announcement for Polycom:

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