Visual effects software company Foundry is being acquired by Roper Technologies (NYSE: ROP), an operator of software businesses across a variety of niche end markets. Foundry is the provider of the well-known Nuke compositing software.
The transaction is expected to close in April 2019.
The transaction price leaps off the page: £410 million (around $545 million USD at prevailing exchange rates). Roper’s press release announcing the acquisition cites an expected revenue contribution for the 12 months post-closing of $75 million (USD). Meaning the all-cash acquisition price represents more than 7x forward-looking annual sales.
And the price is not driven by an expectation of synergies. Roper’s annual report highlights four reporting segments: RF Technology, Medical & Scientific Imaging, Industry Technology, and Energy Systems & Controls. It confirms Roper has no (material) existing operations in the media technology sector. Adding to this observation the press release indicates Foundry is intended to operate as an independent subsidiary of Roper.
To put this pricing in context, the deal value is larger than the annual addressable market of the category of products sold by Foundry (see IABM DC Global Market Valuation Report). Recent transactions such as Belden’s purchase of SAM (0.9x revenue) and Veritone’s purchase of Wazee (0.8x revenue) traded in the range of 0.75 – 1.0x trailing 12 month revenue. Whereas those deals guided seller expectations to more reasonable levels, this deal may (will?) have the opposite effect.
The above cited acquisitions are not direct analogs given the exceptional profitability of Foundry (reviewed below). The rationale for the acquisition – given the press release – is in fact built on the profitability and growth of the Foundry. “Foundry has a strong history of growth in revenue, EBITDA, and cash flow, which Roper expects to continue” reads the press release.
The better question than ‘why’ is ‘how can Roper pay this price?’ Roper is much, much larger than Foundry. Roper’s 2018 revenues were $4.6 billion and EBITDA was $1.6 billion. Roper’s stock is trading at an Enterprise Value of 7.5x trailing 12 months revenue and 22 times trailing twelve month EBITDA. Given Roper’s existing valuation position, the numbers can work. The press release indicates as much: “Roper expects the acquisition to be immediately cash accretive.”
There is also justification found in public comparables. Autodesk is a direct competitor to Foundry in the media technology sector, though Autodesk’s media and entertainment business is less than 10% of Autodesk’s overall revenue. Furthermore, Autodesk has successfully transitioned from a perpetual license model to a subscription model (and been richly rewarded by the market). Regardless, if you view Autodesk as the most appropriate public comparable, then the transaction price is a credit to the savviness of the buyer. Autodesk trades at an Enterprise Value to trailing twelve month sales multiple of 13.5x. If instead you view Avid as the most appropriate public comparable, then the valuation multiple is a credit to the sellers, as Avid trades at an Enterprise Value to trailing twelve months sales of 1.0x.
Setting aside the price, investing in the Foundry has worked out well for several private equity professionals.
In March 2007 visual effects and product company Digital Domain purchased The Foundry. The price was £5 million ($9.8 million USD) and took the form of £550,000 cash, £2 million restricted stock (Digital Domain was not public at the time), and a promissory note for £2.5 million.
On June 2, 2009 the Foundry was divested from Digital Domain in a management buyout sponsored by UK-based venture capital firm Advent Venture Partners. Digital Domain received proceeds of $12 million dollars in the transaction. According to subsequent Digital Domain SEC filings, The Foundry revenue for the full year 2008 was $7.9 million, equating to a multiple of approximately 1.5x annual sales.
The Foundry was sold again in March 2011 to global private equity firm The Carlyle Group for a reported £75 million ($120 million USD). An impressive return for Advent over a two year holding period (10x increase in deal value). Carlyle’s 2011 press release quotes an annual revenue figure of £14.9 million for 2010, implying a 5x trailing sales multiple. UK regulatory filings indicate EBITDA of £6.5 million for 2010 (purchase price was then about 11.5x EBITDA).
The Foundry’s Nuke compositing software had benefited greatly from Apple’s 2006 decision to end-of-life Shake, a widely used compositing software tool. Apple continued to sell Shake until mid-year 2009, which happens to aligns with the tremendous growth The Foundry experienced.
During Carlyle’s ownership The Foundry purchased Luxology (2012) and Made with Mischief (2014) to accelerate its growth. Then in May 2015 Carlyle sold The Foundry to HgCapital for £200 million ($312 million). According to Carlyle’s 2015 press release about the sale, revenue grew by over 160% during Carlyle’s ownership. Regulatory filings indicate 2014 full year revenue was £27.5 million and EBITDA was around £8.5 million. Using these figures HgCapital paid around 7x trailing sales and 23x trailing EBITDA.
The Foundry would rebrand as just Foundry in early 2017. Under HgCapital’s ownership growth of revenue and profitability continued. HgCapitals’ filings indicate Foundry grew revenue by 12% and EBITDA by 54% in 2017, and further states EBITDA grew double-digits in 2018.
The above transaction review understates the equity returns of the investors. Each institutional investor employed debt to magnify its equity return, making these transactions case studies in making money for investors. Based on a review of end of year 2017 regulatory filings, Foundry’s last owner HgCapital had managed to borrow over £260 million pounds of interest-bearing loans – which is over six times annual sales. HgCapital’s 2015 press release stated the HgCapital Trust would contribute £19.7 million of the £200 million purchase from Carlyle. Since HgCapital’s model is to invest alongside other institutional investors, the balance of the equity position is other investors. In HgCapital’s 2016 annual report the residual cost of Foundry is listed at £15.2 million and Hg’s client equity position is listed at 79.1%. If the latter means equity owned not by the Trust, then the total equity commitment was around £100 million – but it is not clear how much of the equity was rolled over by existing investors or management.
Returning to the point, HgCapital indicates in its press release that it (the Trust) will receive cash proceeds of £28.0 million from the sale to Roper. Add to this an earlier ‘realization’ of £3.7 million from a refinancing of Foundry’s debt in 2018 and the total cash return appears to be £31.7 million. Measured against the residual cost of £15.2 million, the return is a doubling of the investment in a little less than four years. It would appear there is, in fact, money to be made investing in media technology.
In an unrelated, separate observation we were asked by TVBEurope to provide an outlook for the M&A environment toward the end of 2018. Here is an excerpt:
Finally, what does he [Josh Stinehour, Devoncroft] expect to see happen within our industry in 2019? “Drawing on the historical record, I expect more of the same: targeted M&A (buy versus build, geographic expansion, etc); creative mergers to add economic scale; pragmatic divestitures by larger technology organisations; and lastly a few totally surprising purchases by large IT organisations based on utterly arbitrary rationales.”
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