JDA Software Group (JDAS) has had an offer on the table to buy i2 Technologies (ITWO) for $346 million, or $14.86 per share. However, JDA recently notified i2 that its financing terms for the current deal are too burdensome, and indicated that it wants to adjust the purchase price downward.
So far, i2 has kept pressure on JDA to close the deal at the current price. But given the recent drop in i2’s stock price from $14.60 to under $9, investors are clearly betting that the current deal will not go through.
The market has undergone a seismic shift since August 11th, when JDA and i2 inked the deal. Since then, JDA’s stock price has continued to track the market tightly, while i2’s was artificially suspended near the merger price. When JDA announced that it wanted to reprice the deal, i2’s share price quickly adjusted to reflect new market realities. i2’s board should view i2’s current stock price as an indication of what the company is worth today on a stand-alone basis.
At $8.89 per share (Friday’s close), the market values i2 at 4.6x EBITDA before stock compensation expense. This is roughly equal to the average of the multiples of its closest public comparables: Manhattan Associates (MANH), which trades at 5.4x EBITDA, and JDA itself, which trades at 4.1x EBITDA.
The deal that JDA wants to retrade values i2 at over 7.7x LTM EBITDA, a premium of over 65% to its current market value and to the average comparable values. This is too rich of a deal for i2 shareholders. A more reasonable price for i2 would be about 6x LTM EBITDA before synergies, or approximately $11.50 per share. This would be a 30% premium to the current market price - a decent win for i2 shareholders - and would be fair to JDA because the price relative to EBITDA after synergies would be about the same as JDA’s current market multiple[1].
Rather than an all-cash deal, I would like to see some of the consideration be in JDA stock - ideally an amount of stock that would bring pro forma net debt to below 1x pro forma EBITDA. The current deal would leave the combined company with net debt of approximately $350 million, which is well over 2x pro forma combined EBITDA - very high leverage for a technology company. Add to that a minimum EBITDA covenant of $130 million (revised down from $136 million on 9/29/08), and the risks become intolerable. (For comparison, SAP (SAP) has no debt and over $2 billion of cash and Oracle (ORCL) also has about $2 billion of net cash.)
Given the economic environment, the risks and challenges associated with post-merger integration, the fierce competitive environment for SCM and enterprise software, and the need to have liquidity for capital investment and small strategic acquisitions, it seems unwise for JDA to take on the amount of debt needed to finance the current i2 deal - no matter what the terms.
The shareholders of i2 would be much better off with a lower price than with a busted deal. The potential $20MM break-up fee would do little to make up for the loss of an acquisition premium.
I own JDA stock at an average cost of about $12 per share, and I expect it to appreciate substantially with or without an i2 deal. JDA is known for its supply and demand chain solutions for consumer goods retailers, manufacturers and wholesaler/distributors. As retailers and manufacturers look to drive earnings through margin improvement in a slowing retail environment, JDA stands to benefit because its solutions deliver real value. JDA has a strong management team, which has proven its ability to balance growth and cash flow.
On October 20th, JDA announced record revenues and EBITDA for the third quarter, and reiterated its confidence in its full-year revenue and profit guidance. Using very conservative growth assumptions, discounting management’s optimism and assuming a recessionary environment over the next 18 months, I put a target price on JDA’s stock of $18 per share. I base this on normal industry multiples as well as discounted cash flow analysis.
If JDA were to proceed with the i2 acquisition on the present terms, I would lower my price target and sell my stock. The current price for i2 is too high; the resulting net debt is too high, and the minimum EBITDA covenant is too restrictive. If the price for i2 comes down, and the deal is restructured to reduce pro forma net debt and eliminate (or significantly lower) the minimum EBITDA covenant, I will increase my price target for JDA by $3-$4 per share. If JDA abandons the deal, I will keep my $18 price target - and my JDA stock.
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[1] From JDA’s viewpoint, the current acquisition price is about 5.3x LTM EBITDA after synergies, a significant premium over JDA’s 4.1x market multiple. In its presentation regarding the merger, JDA projected $20 million of cost synergies, offset in the near term by $6 million of “dis-synergies” reflecting integration costs. At the $14.86 price, JDA would be paying for all of the synergies and handing that value over to i2’s shareholders in cash. A price of $11.50 per share would result in an enterprise value for i2 of approximately $270 million, or 4.1 times the pro forma LTM EBITDA for i2 with synergies (assuming the same debt and cash figures as used to calculate the enterprise value of $346 million based on the $14.86 price, and ignoring the $6 million of “dis-synergies”).
This article has 10 comments:
If you include this amount, it seems JDAS is clearly trying to steal ITWO. The original deal was already at the low end of the valuation range and to lower it any more would not be acceptable. If JDAS wants to lower the price, ITWO should take the $20 million and move on. It can survive just fine without JDAS.
On Nov 10 08:38 AM Contrahour wrote:
> Your analyis gives ITWO no credit for the $80 million payment ITWO
> will recieve from SAP in regards to its out of court settlement.
> ITWO should receive this payment in the current quarter.
>
> If you include this amount, it seems JDAS is clearly trying to steal
> ITWO. The original deal was already at the low end of the valuation
> range and to lower it any more would not be acceptable. If JDAS
> wants to lower the price, ITWO should take the $20 million and move
> on. It can survive just fine without JDAS.
ITWO has $143MM of unrestricted cash on its balance sheet as of 6/30. Add $79MM and you get $222. This is the same figure JDAS has used in its presentations.
On Nov 10 08:38 AM Contrahour wrote:
> Your analyis gives ITWO no credit for the $80 million payment ITWO
> will recieve from SAP in regards to its out of court settlement.
> ITWO should receive this payment in the current quarter.
>
> If you include this amount, it seems JDAS is clearly trying to steal
> ITWO. The original deal was already at the low end of the valuation
> range and to lower it any more would not be acceptable. If JDAS
> wants to lower the price, ITWO should take the $20 million and move
> on. It can survive just fine without JDAS.
- The market values each of ITWO and JDAS at about 4x EBITDA. IF JDAS were willing to pay $11.50/shr for ITWO, it would be a significant premium to what ITWO is worth today. I have no idea if JDAS still wants to do the deal, or what price they would pay.
-The 4x EBITDA for ITWO is probably understated because it is based on results for the 12 mos ended 6/30. As of that time, sales and earnings were trending down, so it would not be surprising if Q3 is more of the same. Surely JDAS knows what ITWO's Q3 looks like. The recent downward revision of the minimum EBITDA covenant on the acquisition debt is probably a directional indication. Since JDAS had a great Q3 and also reaffirmed its guidance for the full year, it seems unlikely that it was the JDAS side of the pro forma EBITDA that triggered the need to revise the covenant....
On Nov 10 11:43 AM supporter wrote:
> I agree with contrahour. Pro forma for at least $15m in synergies
> that JDAS would achieve, ITWO's ebitda would have been $60m. Also,
> ITWO has a significant book/tax difference asset that amounts to
> approximately $170m and a $1.8B NOL. Together, these tax assets
> probably have a NPV of about $100m. So, adjusting ITWO's purchase
> price of $345m for the $100m of value in the tax assets and dividing
> the new number of $240m by $60m of PF EBITDA, then JDAS really only
> paid 4.0x for ITWO. If people think $11.50 is a reasonable price
> for ITWO, then that multiple works out to be 2.7x.... which is obviously
> ridiculous.
On Nov 10 04:17 PM John Appel wrote:
> - No acquirer would pay for book/tax differences or NOLs because
> they can't use them post-acquisition in a stock purchase deal.
>
> - The market values each of ITWO and JDAS at about 4x EBITDA. IF
> JDAS were willing to pay $11.50/shr for ITWO, it would be a significant
> premium to what ITWO is worth today. I have no idea if JDAS still
> wants to do the deal, or what price they would pay.
> -The 4x EBITDA for ITWO is probably understated because it is based
> on results for the 12 mos ended 6/30. As of that time, sales and
> earnings were trending down, so it would not be surprising if Q3
> is more of the same. Surely JDAS knows what ITWO's Q3 looks like.
> The recent downward revision of the minimum EBITDA covenant on the
> acquisition debt is probably a directional indication. Since JDAS
> had a great Q3 and also reaffirmed its guidance for the full year,
> it seems unlikely that it was the JDAS side of the pro forma EBITDA
> that triggered the need to revise the covenant....
On Nov 10 08:13 PM supporter wrote:
> The book/tax differences do have value to an acquiror because there
> are no limitations on those assets under a change in control. ITWO's
> strategic review committee called this fact out on their May 2008
> update call. The NOL usage has an annual limitation of the Treasury
> rate multiplied by the purchase price of the company. So in this
> case, if JDAS purchased ITWO for $345m and the treasury rate is 5%,
> then it could use $17m a year, which would save JDAS about $6m in
> cash taxes per year. The JDAS CFO even called the annual cash value
> of the NOL's on the acquistion cal. So if you are going to continue
> publishing valuation cases on the internet, please get your facts
> straight before doing so.
How can you justify valuing ITWO at $11.50 per share solely as a multiple of EBITDA, when ITWO has cash of $10 per share? EBITDA multiple valuation is an ADDITION to cash on hand, since the two are separate bases for creating value. That does not include the NOL item either, which must be valued and added to the first two.
Even the first JDAS price signed onto by ITWO management does not come close to fair valuation of ITWO. The short hedge funds which control the board are gaming long shareholders.
On Nov 10 08:13 PM supporter wrote:
> The book/tax differences do have value to an acquiror because there
> are no limitations on those assets under a change in control. ITWO's
> strategic review committee called this fact out on their May 2008
> update call. The NOL usage has an annual limitation of the Treasury
> rate multiplied by the purchase price of the company. So in this
> case, if JDAS purchased ITWO for $345m and the treasury rate is 5%,
> then it could use $17m a year, which would save JDAS about $6m in
> cash taxes per year. The JDAS CFO even called the annual cash value
> of the NOL's on the acquistion cal. So if you are going to continue
> publishing valuation cases on the internet, please get your facts
> straight before doing so.
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