ABST - Absolute Software: Accepting The Go-Private Offer May Be The Best Bet

2023-05-18 09:39:00 ET

Summary

• Absolute Software has not met the expectations I outlined in a 2020 article.
• The company recently received a buyout offer from a private equity group.
• That offer provides an elegant exit for the shareholders, and perhaps it's best to just accept it and redeploy the cash elsewhere.

Introduction

About 2.5 years ago, I discussed Absolute Software ( ABST ) ( ABST:CA ) here in Seeking Alpha. I was quite charmed by the company’s free cash flow profile and its robust balance sheet . Unfortunately I was wrong and the financial results in the first nine months of the current financial year show just relatively minimal amounts of free cash flow while the net cash position was converted into a net debt position after a 2021 acquisition . Meanwhile, the company is subject to an all-cash buyout offer from Crosspoint Capital Partners, a private equity group. Considering this offers an elegant exit strategy, I think shareholders should consider accepting it.

The offer: US$11.50/share in cash

Earlier this month, Absolute Software received an unsolicited offer from Crosspoint Capital Partners, a private equity firm, which plans to acquire all outstanding shares of Absolute Software.

As is usually the case with private equity buyouts, it is an all cash offer of US$11.50 per share which represents a premium of approximately 34% versus the share price at the closing bell the day before the M&A announcement. Unless a third party shows up with a higher offer, this appears to be a ‘done deal’. The US$11.50 cash bid has the support of Absolute’s board of directors and its board members and executive officers have already entered into support and voting agreements with their shares. This represents just 1.52% of the total share count and obviously is not high enough to actually block the transaction, so a third party bid is always possible.

The transaction should close in the second half of this year (assuming the shareholders will greenlight the deal, of course).

What are shareholders giving up? A look at the recent quarterly results

Back in 2020 I was cautiously optimistic about Absolute Software as the company’s free cash flow result was gaining momentum. Of course, a lot of time has passed and it makes sense to have another look at Absolute’s financial performance to see what exactly the shareholders are giving up on if they accept the buyout offer.

During the first quarter of the current calendar year (which is the third quarter of the financial year as Absolute Software’s financial year ends in June), Absolute generated a total revenue of $58.8M on which it generated a gross margin of $48.7M.

This doesn’t mean Absolute Software was massively profitable. The company still has to spend a lot of money on R&D and marketing, and the operating income was just $1.77M, as you can see in the image above. This also means that once the interest expenses were deducted, Absolute Software still published a pre-tax loss, this time to the tune of $5.8M. And despite a $1.8M income tax recovery, the bottom line still showed a net loss of around $4M.

That’s not great, but in my original article I focused on Absolute Software for its cash flow potential. During the third quarter of its financial year, Absolute reported a positive operating cash flow of $14.3M. Keep in mind this includes a contribution from working capital changes to the tune of $2.8M while it also excludes the cash interest payments ($7.2M) and the lease payments ($1.2M).

This means that on an adjusted basis, the operating cash flow was actually just $3.1M before changes in the working capital position. Fortunately the capex was just $0.3M (the company expenses most of its R&D elements) which means Absolute Software was still reporting a positive free cash flow. That being said, a quarterly free cash flow of $2.8M is not very impressive. Looking at the cash flow results in the first nine months of the year, the adjusted operating cash flow was $9M, resulting in a free cash flow result of just $7.7M after deducting the $1.3M in capital expenditures.

Considering there are 53.1M shares outstanding, the free cash flow per share came in at $0.05 in Q3 and $0.15 in the first nine months of the current financial year.

Investment thesis

Unfortunately this means my initial investment thesis from 2020 hasn’t played out yet. Sure, the company is free cash flow positive but those free cash flows are definitely not as robust as I had expected. From a valuation perspective, I think the $11.5 takeover bid is fair, especially considering the balance sheet contains in excess of $200M in net debt . This means all-cash bid values Absolute Software at an enterprise value of approximately $820M (excluding lease liabilities, $870M including all financial liabilities ). And considering the EBITDA (adjusted for lease expenses) was just US$20M in the first nine months of the year the offer appears to be fair from pretty much every perspective.

As it is an all-cash offer, it does create a liquidity event and it offers the shareholders of Absolute Software a good chance to exit the position. It’s too bad my initial optimism from a few years ago wasn’t warranted and the sale to Crosspoint Capital Partners likely is the most elegant solution.

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