EVS announced the acquisition of Axon, a media networking infrastructure provider based in the Netherlands.
This is – by orders of magnitude – the largest acquisition EVS has made in its history. Acquisitions are rare for EVS; big acquisitions even more rare. The most recent EVS deal was the acquisition of Scalable Video System GmbH (SVS) in early 2015, which is today the Dvyi switcher product in EVS’s portfolio. Prior to SVS, EVS acquired Open Cube Solutions (MXF toolkit) in early 2010.
Deal Terms and Financing
EVS disclosed a transaction value of €10.5 million, plus a possible maximum earn-out of €2.5 million. Axon generated annual revenue of €17.5 million in 2019, yielding an enterprise value to trailing twelve-month revenue multiple of 0.6x (or 0.74x if you include the value of the earn-out).
EVS management intends to fund the acquisition through cash and debt. As of the last balance sheet date, December 2019, EVS had cash funds of €59.0 million. EVS is relatively debt-free, having only €4 million of bank debt outstanding. The fixed interest rates for this debt are all below a 1.0% annual rate, owing to the credit worthiness of EVS, the interest rate environment, and the use of funds for the debt, which was to construct the Company’s new Seraing, Belgium headquarters.
Even though EVS has more than enough financial capability, the use of cash in the current environment is notable. In a March 25, 2020 financial release, the EVS board cancelled the planned May 2020 €0.50 dividend given the “exceptional market conditions.” Eliminating the dividend payout equates to a roughly €7.1 million preservation of cash (~68% of the Axon deal value). Cancelling the dividend is not an easy corporate decision. EVS has paid a dividend every year since its IPO in 1998.
As part of the same release in late March, EVS management retracted its revenue guidance citing several negative developments to revenue. The postponement of live events in 2020 defers the recognition of EVS’s (December) backlog of €12.3 million worth of rental orders for large events. More uncertain is the near and medium term impact to live service provider customers. The release notes “Live Service Provider customers have heavily reduced their level of activity.” For a more detailed review of the impact to outside broadcast customers, we recorded a podcast with Game Creek Video CEO Pat Sullivan in early April.
The use of funds for an acquisition is also noteworthy given the ongoing efforts by EVS to use its cash resources to buyback its shares. The buyback program was initiated to ward off the late 2018 acquisition attempt expressed in the form of purchases of EVS stock by Evertz.
The objective results of those stock purchases are as follows. As of April 24, 2020 EVS had spent €9.8 million buying back its stock since October 2018. Average stock price of the purchases was €19.0 per share. EVS stock closed today at €13.94 or nearly 27% lower than the price EVS paid. While the buyback and other capital market activity may have served to dissuade Evertz, by no other capital market measure does the buyback look successful in hindsight – share price is lower, share volumes were lower, and cash balances are lower. We acknowledge that despite these measures there are still reasonable arguments supporting the decision.
Debating the merits of stock buybacks has become fashionable in early 2020. For those ready to condemn EVS’s management, we would highlight EVS did not borrow money to buyback its stocks, rather the Company used available cash. Instead of taking a position, we would rather pose a series of rhetorical questions to the reader.
First, note the level of the stock buybacks is roughly equivalent to the intended expenditures for acquiring Axon. Second, the rationale of the deal is in large measure (discussed more below) to expand EVS’s product and intellectual property portfolio. Therefore, in the below you could substitute ‘buy Axon’ where we have listed the acquisition rationale.
- If you were an EVS shareholder would you rather EVS (i) expand its product and intellectual property portfolio or (ii) buyback its shares?
- If you were an EVS customer would you rather EVS (i) expand its product and intellectual property portfolio or (ii) buyback its shares?
- If you were an EVS competitor would you rather EVS (i) expand its product and intellectual property portfolio or (ii) buyback its shares?
(If you are interested in responding to the above, feel free to leave a comment).
A pure financial accretion perspective is favorable to an Axon acquisition. While there is no profitability guidance about Axon, the revenue multiple of 0.6x is decidedly lower than where EVS trades on a revenue basis (1.4x trailing twelve-month revenue).
Axon Background and Deal Valuation
Axon was owned by private equity group Mentha Capital, a firm making investments in mid-sized profitable companies located in the Netherlands and Flanders. Mentha acquired a majority stake in Axon in August of 2010 from Goldman Sachs Merchant Banking Group (yes that Goldman Sachs). Market dynamics in the years preceding 2010 caused Goldman Sachs to review its asset portfolio, leading to the divestiture. Mentha would extend its equity interest in Axon in March 2015 by buying the stake of Potosi investments.
Mentha therefore owned Axon for just under a decade – a healthy holding period for a private equity business. It is a holding period bookended by global financial crises and an awful lot of change in the global media technology sector.
Market developments and competitive encroachments do not appear to have been kind to Axon. Regulatory filings cite Axon’s 2012 revenue as €27.6 million, 57% bigger than in 2019. Profitability was robust for Axon in the 2012 calendar, operating margins exceed 20% in its regulatory filings. Corresponding filings for 2017 and 2018 show negative operating margins.
Emblematic of this decline is Axon’s presence in the North American market. Axon’s access to the North American market was impacted when its go-to-market partner NVISION was acquired by Miranda Technologies in March 2009. Axon never managed to restore its sales exposure in North America despite its best efforts. As recently as the 2015 NAB Show, Axon exhibited in a 1,200 square foot booth. At the 2018 NAB Show Axon did not have a standalone booth, rather having a presence on its US distributor Utah Scientific’s booth (though Axon did have a standalone 400 sq. ft booth in 2019). EVS’s FAQ page describes Axon’s exposure in the Americas as “totally absent.”
In July 2018, Axon announced Michiel Van Duijvendijk, most recently CEO of NEP Netherlands, would succeed Jan Eveleens as CEO. Eveleens held the CEO position since 2009.
Followers of Devoncroft’s annual Big Broadcast Survey (BBS) will appreciate the value of Axon’s brand. As recently as 2017, the BBS highlighted the strength of the Axon brand across a variety of brand drivers. Those same brand scores foreshadowed the challenges Axon would experience in attempting to grow outside of its core customers.
This next part drifts into opinion.
Before passing judgement on Axon or the price Axon received, consider the circumstances. Since 2012 there is nothing in the public space to suggest Axon had either revenue growth or meaningful levels of profitability and lots of data suggest revenue was declining and profitability curtailed. Market circumstances are just as responsible for the financial results as any other factor. Given the resource constraints of a relatively small business with sales concentration in a few regions was there a better option than combining product portfolios and sales channels with a larger, adjacent entity? For those who disagree, we would counsel you to ponder how truly difficult regional expansion is to achieve in the media technology sector.
Regarding price, considering the current economic environment and its impact to EVS (highlighted by the cancelling of the dividend), the price is supportive of EVS’s view on the strategic value of Axon’s products and intellectual property. It is also a higher upfront valuation than Grass Valley received after a public auction conducted by JP Morgan prior to the COVID disruption. (The Black Dragon / Grass Valley deal contemplates an upfront consideration of less than 20% of stated deal value).
One last point on the valuation. As alluded during a podcast we recorded earlier this year, these may very well be the multiples (0.5x – 0.75x revenue) at which businesses transact for the foreseeable future in the media technology industry.
Strategic Deal Rationale
In terms of annual revenue, Axon is roughly 17% the size of EVS. In terms of employee, count Axon is also roughly 17% the size of EVS. Again, it is a big, material deal for EVS.
Question one of EVS’s FAQ (frequently asked questions) site is ‘Why an Acquisition?’
The provided answer: “Mergers and acquisitions (M&A) are part of the PLAYForward strategy to progressively increase the scope of EVS solutions.”
PlayForward was a company-wide initiative launched by EVS in October 2019. It took the form of 35 EVS global personnel “brainstorming on our strengths, and weaknesses, industry trends, and own long-term ambitions” according to the 2019 EVS annual report. The session occurred approximately one month after the start of new CEO Serge Van Herck, formerly of Newtec (note the ‘c’).
The details of PlayForward are scant or at least are difficult for us to locate. It is cited in the press release announcing the Axon deal as “a global company growth strategy that identified the importance of developing a broader offering of modular and flexible IP infrastructure.”
There is a laudable amount of commentary and collateral on the strategic rationale of the deal for EVS. The preceding sentence is meant as a complement to the EVS management team. Discussions about product alignment and go-to-market strategy, combined with a thoughtful FAQ for interested parties are refreshing.
To maintain a modicum of brevity, we will only rehash two points made by EVS in its press release. Of particular note, EVS adds heavy emphasis to the synergy between its IP solutions and Axon’s control and signal processing products.
“This acquisition, the largest in EVS’ history, will position EVS as the only technology company able to provide a comprehensive modern media infrastructure solution that includes advanced IP processing, SDI/IP conversion, SDN-based control and monitoring, as well as UHD-4K and IP multiviewer.”
We have added emphasis to “the only technology company” phrase from the press release. It affords us a good opportunity to remind the reader we recorded a podcast with Tim Shoulders President of a technology supplier by the name of Grass Valley.
“Additionally, EVS will benefit from Axon’s extensive relationships with channel partners, while also broadening the reach of its industry-leading product portfolio to different distribution channels.”
The above press release excerpts hints at the potential of EVS to expand its products into new markets better addressed through indirect channels where Axon has existing relationships. EVS is wise to keep the statement vague. Growing down market is … well … often impossibly difficult in practice.
Financial Deal Rationale
EVS retracted its annual guidance because of the current market disruption. The mid-point of management’s guidance had been €110 million for the 2020. Such a nominal revenue level is less than EVS recorded a decade earlier in 2010 (€111 million in 2010). The lack of revenue growth is starker when considering over the past decade Eurozone inflation has averaged around 1.73% per year, yielding a decrease in purchasing power of the Euro of just under 20% during the past decade. At the risk of belaboring the point, during the past decade EVS has benefited from the general decline of the Euro versus the USD. Measured in USD terms, EVS revenue has declined 18% since 2010. (At least 28% of 2019 revenue was invoiced in dollars).
Profitability has similarly declined. Operating profit declined 49% in aggregate from the even year 2010 to the latest even year 2018. Operating margins declined 2500 basis points. Operating performance in 2010 was achieved with a complement of 366 employees. EVS started 2020 with 464 employees – over 25% more staff – yet had set similar revenue targets to a decade earlier.
The point of the above is a different approach is required for the media technology sector of the next decade. EVS is acting.
The announcement of the deal indicated “the Axon brand will be absorbed into EVS over the coming weeks.” We reached out to the EVS team and can confirm the current intention of EVS is to sunset the Axon brand in the near term. Difficult choices are necessary in the integration phase of deal.
To conclude on an unbridled note of optimism, let us quote Pat Sullivan CEO Game Creek Video from the aforementioned podcast. The quote is Pat’s observation on the opportunity available to technology suppliers in the live production market. “It’s not a business that’s on a lot of people’s radar, but once you get in and you perform, and you can perform at a high level technically with reliability, then you can do really, really well serving the mobile television industry.”
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