Sage could appeal to PE buyers as stock wobbles on downgrade – bankers
24 AUG 2018
- Logical strategic suitors seen scarce
- PE could see roll-up or split and sell strategies
Long-time rumoured target Sage [LON:SGE] could easily find a private equity buyer if growing competitive pressures push it towards a sale, bankers following the situation said.
The stock was downgraded by Deutsche Bank this week, which found the competitiveness of Sage’s mid-market offering to be worsening. Sage’s share price fell to GBP 6.19 per share from GBP 6.65 last Friday on the bank’s report, which set a target price of GBP 5.40.
A takeover of Sage has been expected for several years as the software market consolidated, with the most persistent rumours pointing to Germany’s SAP [ETR:SAP] and Microsoft [NASDAQ:MSFT]. But Microsoft has previously looked at the asset and decided against it, the first banker said.
Microsoft already has a commercial partnership with Sage, and also offers software that directly competes with the UK software company, an industry analyst said. Similarly SAP would not gain a competitive advantage by acquiring the company, the second banker said.
In fact the only realistic trade buyer remaining is business and financial services company Intuit [NASDAQ:INTU], the second banker said. It has the most similar offering to Sage and could justify the increased scale from absorbing a smaller company’s customer base, the banker said. Sage’s market cap is GBP 6.9bn compared with Inuit’s USD 54bn.
The Deutsche Bank note said the analysts had spoken to Sage competitors including Intuit. ‘Higher end competitors also appear to be gradually gaining share from Sage’s core user and reseller base,’ the note said.
Sage has also previously been linked to IBM [NYSE:IBM], but it is not on the technology company’s radar, an industry source said.
An acquisition by private equity firms – likely a consortium due to Sage’s size – is more probable however, the bankers said. This has been explored by players in the past, the first banker said.
Sage is a PE-friendly asset, both bankers said. This is due to recurring revenue and presence in a high-growth market (cloud infrastructure), the first banker said. Sage achieved 13% cloud growth year-on-year, according to its FY18 investor
factsheet. Its rating is also undemanding, the second banker said.
PE backing could also help Sage’s M&A strategy, the first banker said. Sage has traditionally bought up its smaller competitors, but recently have been outbid by PEs on a series of such deals, this banker said.
If all else fails, PEs could make money on the investment by splitting and selling Sage’s divisions, the first banker said. The natural split would group payments and banking, then accounting with HR-related software, the banker said.
Buyers would look to pay a low double digit multiple, the second banker said. Recent deals in the sector include Dealogic's 2017 sale to ION Investment Group for an undisclosed consideration, Fidessa's USD 2bn sale to ION Investment Group at 4.7x recurring revenue and 25.9x cash EBITDA, and Iris' May sale to HgCapital for an enterprise value of GBP 1.3bn.