Empire Capital: Making Rain with Its Security Software Sale

by Brenon Daly

For the second time in less than a year, a micro-cap security company in which hedge fund Empire Capital holds a big position is being taken off the board. On Monday, Entrust (ENTU) said it agreed to a $114m offer from buyout firm Thoma Bravo. Terms call for the acquirer to pay $1.85 for each of the 61.3 million Entrust shares outstanding. The roughly 22% premium essentially values Entrust where it was last October. (The deal also carries a ‘go-shop’ provision.)

Empire, which has a seat on Entrust’s board, holds about 11.8 million shares of the company, or 19% of the total. (That means the hedge fund’s payday for its stake will be just $22m.) Although the board has signed off on it, the terms of the buyout aren’t exactly staggeringly rich: Entrust has $24m in cash and no debt, lowering the company’s enterprise value to just $90m. Entrust did about $100m in sales in 2008 and was expected to record only a slight dip in revenue this year, according to Wall Street projections.

The valuation of less than 1x trailing revenue for Entrust is just half the level of Tumbleweed Communications (TMWD), the previous security company that Empire was involved with. In a trade sale last June, Tumbleweed got picked up by French rival Sopra. The deal valued Tumbleweed at nearly 2x trailing sales. Of course, it was a different time back then. For its part, Entrust was trading at about $3 on the day Sopra announced the Tumbleweed acquisition.

Comments

[Bandwagon2009]

While the valuation is low for a security company -- especially when you look at comparable before last year. It was clear that ENTU was not going to breakout...there was no path for it to become a $1B revenue company or even a $400M company...neither was there a path for a tremendous profitibility or cash flow bump.

This values the company at about the same multiples as other steady eddy technology companies.

BTW I don't know if privatization really changes anything -- other than potentially reduced cost of compliance and filings. If there was a potential strategy for a roll-up and the change-play then this would be more interesting.

2009 Apr 15 07:29 AM