Summary
- Clarivate Plc has been hugely active in its dealmaking efforts in recent years.
- A build-up in leverage and softer share price, resulting in a cheap dealmaking currency, leaves few options for dealmaking.
- Valuations have come down a lot, although leverage is a touch high, yet overall appeal is slowly starting to emerge here.
In February 2021, I last had a look after quite a year 2020 was for shares of Clarivate Plc ( NYSE: CLVT ) . 2020 was a year of very active dealmaking for Clarivate, creating a $20 billion valued analytical play which was very predictable. With interest rates moving up and valuations being very demanding, it was too early for me to get involved with Clarivate.
Some Background
Late in 2018, Clarivate went public around the $10 mark as intensive dealmaking and expanding valuations meant that shares rose to a high around $30 late in 2020 and early in 2021. Clarivate is a provider of IP, scientific information, analytical tools & services, using this information for the discovery, protection and commercialization of ideas and products.
Spun-off from Thomson Reuters in 2016, the company was bought by private equity, after it merged with Churchill Capital to go "public" in its current form. This merger set the company up for 2020 sales at $950-$970 million, and EBITDA around $340 million early in 2020. With 329 million shares trading at $20 ahead of the pandemic, the $6.6 billion equity valuation rose to $7.8 billion after incorporating net debt. This translated into an 8 times sales multiple and 23 times EBITDA, high valuations which were driven by the search of investors for predictable and solidly growing businesses, in a still relatively low interest rate environment.
Along with announcing the purchase of Decision Resources, which looked decent, the company announced a huge CPA Global deal in July 2020, giving shareholders of CPA a 35% stake into the business. With the deal closing later in 2020, investors liked the deal and anticipation of synergies. Consequently, shares rose to the $30 mark as the company provided a 2021 sales guidance at $1.8 billion on which $800 million in EBITDA and adjusted earnings of $0.76 per share were anticipated.
Trading at 40 times adjusted earnings around the $30 mark, with earnings looking quite realistic, valuation multiples were rich, far too rich to see any decent risk-reward situation; in fact, I saw an unfavorable proposition.
Come Back To Earth
Fast forwarding from early 2021, shares are down 60% in the time frame of about one and a half year in time, now trading at a low of $12 per share.
Clarivate announced a huge $5.3 billion deal in May 2021, as it announced the purchase of ProQuest, a deal set to add $875 million in sales and $350 million in EBITDA and with shares down to the lower $20s in 2021, triggering the company to announce a $250 million buyback program at the time.
The company announced a billion dollar buyback program early in 2022 and in March it posted the 2021 results. Revenues were up 50% to $1.88 billion, ahead of the original guidance, as the ProQuest deal only closed in December 2021, hardly contributing to the annual results , with organic growth coming in at 4% and change. Adjusted EBITDA was reported at $800 million but of course the forward results imply some further growth.
This is seen in the 2022 guidance with revenues seen at a midpoint of $2.84 billion, $1.19 billion in EBITDA and adjusted earnings seen at a midpoint of $0.90 per share, up from $0.72 per share in 2021. With net debt posted at $5.0 billion, leverage ratios are very high based on 2021 performance, and come in at just over 4 times forward EBITDA.
With interest rates moving up and valuations coming down, shares traded around the $15 mark. This comes down to a 16-17 times earnings multiple which looks reasonable, but there are some caveats. The 2021 $0.72 per share adjusted earnings number excludes some $0.21 per share in stock-based compensation expenses, for more realistic earnings around $0.50 per share, which still translated into a steep 30 times multiple.
Consolidation
2020 has been a rather uneventful deal after a couple of huge deals in recent years. First quarter results revealed 4% organic growth as the company maintained the guidance for the year, yet alongside the second quarter earnings report, the company cut the full year outlook. The company cut the midpoint of the sales guidance to $2.73 billion and the EBITDA guidance to $1.14 billion, reducing the midpoint of the earnings guidance by five cents to $0.85 per share. This is disappointing as net debt is consolidating around $5.1 billion, making that leverage ratio just above 4 times inched up to 4.5 times based on the full year outlook.
Softer performance is the result of the combination of dollar strength and a tougher macroeconomic environment. In a smaller effort to address the high leverage, Clarivate has actually announced a small divestment in September. The company reached a $302 million deal to divest MarkMonitor in an effort to cut net debt from $5.1 billion to $4.8 billion. That however comes at a price as $80 million in revenues and $35 million EBITDA will leave the door, implying that deal comes in at just below 9 times EBITDA.
With 680 million shares of Clarivate now trading at $12, Clarivate is currently valued at just over $13 billion (based on an enterprise valuation). This is equivalent to roughly 5 times sales and around 11-12 times EBITDA, indicating that the latest deal (which is a very small at 3% of total sales) comes in a touch cheap. It will help to address leverage a bit, effectively offsetting the cut in the full year EBITDA outlook, but is not that inspiring.
With adjusted earnings now seen at $0.85 per share and with stock-based compensation only trending at $0.15 per share this year, a realistic $0.70 per share number works down to a market multiple. This marks the lowest multiple for a long time for this solid play, as 4% plus organic growth is pretty decent, yet leverage remains an issue of debate. Moreover, dealmaking is more or less prohibited because of leverage and a cheap stock price, as the focus now will be on execution, integration and deleveraging.
While leverage is a bit high for my taste, I do feel as if now is the time to gradually warm up to Clarivate with valuations coming down substantially, to the point where appeal is to be seen here for those with a long term horizon.
For further details see:
Clarivate: A New Analysis