Cyber security software provider Kape Technologies (KAPE:290.5p) has received an underwhelming cash offer of $3.44 (285p) from majority shareholder Unikmind, a company wholly owned by Tedi Sagi, the founder of gaming software group Playtech (PTEC). It values Kape’s equity at $1.5bn (£1.21bn) and on an enterprise valuation of $1.6bn.
It’s hardly generous, valuing the group on 9.3 times last year’s cash profit to enterprise valuation, or half the multiple (19 times) that NortonLifeLock paid for rival Avast. A prospective 2023 cash profit multiple of 8.1 to enterprise value represents a 42 per cent discount to Kape’s average rating over the past five years, too. Based on Progressive Equity Research’s 2023 earnings per share (EPS) estimate of 44¢ (37p), the exit forward price/earnings (PE) ratio is 7.7.
Moreover, the offer is 15 per cent below the 337.5p placing and retail offer price when Kape raised $354mn to fund the $936mn acquisition of ExpressVPN in 2021, and modestly above last autumn’s 265p placing and retail offer price when the group raised $222.5mn.
Unikmind has stated its intention to seek a delisting of the shares regardless of the outcome of the offer, noting that the best way to support Kape’s buy-and-build strategy is through capital investment away from public markets. If that is the case, then it needs to offer a much higher price.
An offer at odds with Kape’s high growth prospects
- Unikmind’s cash offer is at a 12.3 per cent premium to the volume-weighted average share price over the past three months
- Kape’s enterprise valuation is supported by a prospective 2023 free cash flow yield above 10 per cent
The offer comes a matter of weeks after I highlighted Kape as one of my takeover targets for 2023 (‘Four takeover targets’, 10 January 2023), noting at the time the chronic undervaluation of the shares both in terms of the modest earnings multiple and free cash flow yield.
Subsequently, Kape’s management issued a bullish pre-close trading update ahead of the company’s annual results on 21 March 2023, pointing out that the integration of ExpressVPN exceeded their expectations. The group expects to deliver in full the planned operational synergies of $30mn this year. The directors also flagged up that the group’s 2022 pro-forma cash profit was slightly above previous guidance at $173mn.
The trading statement prompted analysts at brokerage Shore Capital to push through small upgrades to their 2022 estimates and to reiterate their 2023 forecasts, which imply current-year free cash flow of $169mn, or more than 10 per cent of the $1.6bn enterprise valuation that Unikmind’s low-ball offer values Kape at. Based on these forecasts, the takeover would be self-funding for Unikmind, which controls 54.8 per cent of the shares in issue, having arranged $610mn loan facilities to buy out minority shareholders, as well as a $100mn equity injection from Sagi.
Unikmind has been supportive of Kape’s growth strategy, investing $525mn in the shares to help the group acquire seven companies for $1.25bn in the past five years. I have been supportive of the growth strategy, too, having selected the shares, at 47.9p, in my market-beating 2017 Bargain Shares Portfolio. In the subsequent six years, the holding has delivered a 512 per cent total return (TR), massively outperforming the FTSE Aim All-Share and FTSE All-Share indices, which have produced TRs of 5.2 and 37.3 per cent, respectively.
However, Unikmind’s offer falls well short of the 500p-a-share fair valuation I outlined when I covered (at 285p) the interim results (‘Tapping into prodigious free cash flow generators’, 12 September 2022). The takeover premium is underwhelming. I would hope that other investors feel the same way to force Unikmind to come back with a higher offer that better reflects the value embedded in Kape’s existing operations and its growth prospects. The market is betting on this outcome as the shares (291p) are now trading above the 285p offer price. Await developments.
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