NEW YORK, April 30, 2020 /PRNewswire/ -- Spruce Point
Capital Management has issued a letter sent to the management of
Advent International ("Advent") recommending that Advent critically
reexamine its agreement to purchase Forescout Technologies, Inc.
("Forescout" or "the Company"). Accompanying the letter is a report
supporting our view that the deal price could be revised lower by
up to 35%-50%, if not called off entirely. We will be sharing
details of our thoughts and research opinions throughout the day
exclusively on Twitter @sprucepointcap.
On February 6, 2020 Forescout
announced its purchase by Advent for $33/share in a $1.8bn deal. We believe investors ascribe too
high a probability that it's a done deal. Upon conducting a
forensic analysis of deal proxy statements, we observe that some
financial forecasts reviewed by Forescout internally may not have
been shared with prospective acquirers – and that some of these
forecasts were materially worse than those known to be disclosed to
buyers. Whether or not this represents a breach of reps and
warranties, we believe it should serve as grounds for Advent to
negotiate a lower share price. Advent's interest in revisiting the
terms should be high given that the deal was struck just weeks
prior to the WHO declaring COVID-19 a pandemic, which we believe
dramatically alters the financial outlook for Forescout, a negative
EBITDA business which was already under growth pressures and
missing its guidance. Importantly, with the onset of the pandemic,
Spruce Point estimates that it is likely in Advent's interest to
walk away from the deal – even after taking into account its
$112M termination fee.
We believe Advent substantially overpaid, underscored by
Investcorp's recent purchase of Avira in early April. Avira, a
profitable cybersecurity company, was acquired at a revenue
multiple >50% less than that of Forescout's. We believe that
Advent can, and should, use this as leverage to renegotiate the
deal price lower. In our opinion, Advent, a steward of public
pension capital, must negotiate a lower deal price more reflective
of Forescout's ominous outlook, rather than unjustly enriching
management with a $100m payday, and
early VCs for having created limited / no value as a public company
in our opinion.
- Was Forescout's Complete Financial Outlook Shared with
Prospective Buyers? Upon a close forensic analysis of the deal
proxy statement, Spruce Point believes that some financial
forecasts prepared by management may not have been shared with
prospective buyers. In particular, forecasts which projected FY20
sales 8%-9% lower than the Company's primary "Target Plan" were
prepared and analyzed internally at various points through the
acquisition timeline, but appear not to have been submitted to
potential acquirers. In each case, these internal financial
forecasts appear to have represented plausible outcomes for Company
performance based on management's best knowledge of the state of
the business at the time, and, accordingly, should have been shared
alongside its more optimistic forecasts.
One of these forecasts was management's preliminary Q1 and
full-year FY20 revenue guidance which it planned to (but did not)
share on its Feb 6, 2020 (Q4 FY19)
earnings release call – a call which was cancelled upon the deal's
announcement that very morning. With the Q1'20 guide a full 20%
below consensus Q1 estimates and suggesting year-over-year
contraction, the announcement could have dealt a crushing blow to
the stock, possibly altering the course of any acquisition talks.
With Advent – a financial buyer – having shown a relatively high
level of sensitivity to forecast adjustments over the course of the
negotiation, Spruce Point believes that the later disclosure of
this guidance revision lower in the deal proxy may serve as
motivation for the firm to walk away from the deal, or at least
demand renegotiation.
- A Busted Dinosaur IPO Under Greater Pressures Remarketing Debt
Capital in A Highly Discriminating Environment: It took Forescout
17 years to IPO, giving analysts reason to dub it a "dinosaur" IPO.
As a public company, we believe Forescout has created little to no
value for shareholders and was showing signs of fundamental strain
even prior to the onset of the COVID-19 pandemic: a disappointing
Q3 FY19 preannouncement sent shares tumbling down ~37% as top-line
growth decelerated to single-digit levels for the first time in
years. Spruce Point finds evidence of widespread dissatisfaction
among its employee base, notably the front-line sales force which
has shown significant turnover.
The product itself has also received increasingly unfavorable
reviews through the past several years as the competitive landscape
has grown more crowded. Based on our primary due diligence, we
learned that competitors are bundling more solutions, and cyber
deals for small and medium sized businesses are being delayed,
leading to pricing pressure. With a large percentage of Forescout's
customers tied to government spending where margin upside is
generally limited, a history of negative EBITDA and free cash flow,
and an uncertain SaaS transition, we believe investors should be
worried about $400m of debt capital
needed to fund the transaction during a newly disclosed
"remarketing" period.
Spruce Point estimates that, given (1) Advent's potentially
incomplete view into Forescout's financials during the negotiation
process, and (2) pandemic-related developments which we believe
erode the Company's outlook going forward, a conservative
reevaluation of the deal featuring NO multiple compression could
see Advent value FSCT more than 20% below the $33/share deal price. Despite facing a
$112M termination fee, a
straight-forward cost/benefit analysis reveals that, at the current
terms, Advent would do better to walk away from the deal rather
than complete it. We believe that, in a realistic scenario in which
Forescout's projections are revised downward, and the multiple
compressed, Forescout shares should be valued between $17-$22 regardless
of whether the deal is renegotiated or annulled completely,
yielding 35%-50% downside to the $33
price.
Spruce Point Capital has a short position in Forescout (NASDAQ:
FSCT) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value, and special situation investment
opportunities.
Contact
Daniel Oliver
Spruce Point Capital Management
doliver@sprucepointcap.com
(212) 519-9813
Spruce Point Capital Management, LLC is a member of the
Financial Industry Regulatory Authority, CRD number 288248.
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SOURCE Spruce Point Capital Management, LLC