On May 1st, 2013, Ebix (EBIX) announced that it has entered into a definitive merger agreement to be acquired by an affiliate of Goldman, Sachs & Co. ("Goldman Sachs") in a transaction valued at approximately $820 million, including the assumption of any outstanding debt (~77MM). The offer translates to $20/share for the common stock. The affiliate is "Broad Street Principal Investments, L.L.C.".
It is a bittersweet one for the long time shareholders. It is bitter because the offer undervalues EBIX by almost 50% and it is sweet because the EBIX bull case is bolstered by none other than Goldman Sachs. It is safe to assume that Goldman would have done the due diligence on EBIX to discount rumors of accounting impropriety. I had outlined the strategy of EBIX in an earlier Seeking Alpha article. EBIX CEO Robin Raina's merger and acquisition strategy has worked really well in the past decade. Raina now wants to continue his strategy away from the glare of public markets and at the expense of current shareholders.
The current valuation
1. Let us first consider the last 10 years of EBIX valuations on a price/book, price/cash flow, price/sales and price/earnings metrics. The comparison of EBIX with S&P is from Morningstar.com. EBIX is trading at historically low valuations on both price/cash flow and price/earnings. Given the historically low capex requirements of EBIX, at a normalized price to cash flow ratio of 15, EBIX should be valued at $28/share (2012 free cash flow of $70MM with 37,147,313 shares outstanding). EBIX is currently trading at a 50% discount. Companies like Guidewire (NYSE:GWRE) that operate in the same space trade at a much higher valuations.
2. EBIX has reported increasing revenues, earnings and free cash flow. The short attack that started three years back has put a lid on the stock price.
3. A look at the performance of EBIX and software industry for the last three years reveals that EBIX didn't participate in the recent bull market.
Given the historic low valuations, high growth and future prospects, the management led takeover at low premium raises a lot of eyebrows. The takeover premium is an unheard of 7.5% (from Tuesday 4/30/13's closing price) and 18% from the average of last 30 trading days. EBIX's current CEO Robin Raina will continue to remain the CEO after the merger. Robin Raina and his Raina foundation currently own 15% of the outstanding shares and after the merger, their stake goes up to 29%. The Rennes foundation owns 10% of EBIX and Robin Raina has voting rights on these shares. The Rennes foundation is also participating in this deal and gets a 15% equity of the new company. The question that begs to be asked is why would Goldman give up an extra 14% stake for Raina and 5% for Rennes for no reason. The deal structure is as given in the table.
The deal values EBIX at EV/EBIDTA of 820/84 ~ 9.5. It is noteworthy that EBIX's capex is only 2MM and has free cash flow yield of 10%.
EBIX is able to take high leverage due to the following reasons.
- High recurring revenue (80%)
- Low customer attrition rate
- Favorable tax rates due to the presence of development centers in India and IP centers at Singapore
- Sustainable 40% operating margins
- Low capital expenditures and strong free cash flow generation
The upside for Raina, Rennes and Goldman Sachs
Raina had set an aspirational goal of $500MM revenues by 2017.
Source: EBIX PR dated June 05, 2012
"In the last investor call, I indicated our short term goal of reaching annualized revenue run rate of $200 million in 2012 and an aspirational goal of $500 million of revenue in five years. I am pleased to convey that we are now on the path to exceed the first goal of $200 million in annualized revenue run rate." Ebix President & CEO Robin Raina said, "Our ability to generate an annualized EBITDA run rate of approximately $100 million, is clearly a landmark event in the company's history. We are committed to using our free cash flow to grow Ebix through reinvestment in the core business and acquisitions as well as return capital to shareholders through stock repurchases and dividends."
Raina has hit on all his performance goals that he set earlier. In 2008, Raina set a revenue run rate goal of $100MM by 2009. The $200MM revenue goal for 2012 was also met. If EBIX achieves the $500MM revenue prediction, how much would it be worth today? EBIX has sported a 40% net operating margin. With negligible capital expenditure expense, EBIX would be generating 200MM in free cash flow. If we value EBIX at a conservative 10 times cash flow and discount it by 15%, we get a present value of roughly 2 billion dollars. At this valuation, the $211MM equity would give a return of 7 times in five years after repaying the debt, and an IRR of 47%. It is no wonder that Robin Raina is in such a hurry to take EBIX private and pocket all the upside.
As recently as July 2012, EBIX bought back 280,818 shares at price of $20.49. The current offer of $20/share strongly undervalues EBIX by a wide margin. I strongly recommend that EBIX shareholders vote "No" for the merger. EBIX can generate the same upside to current shareholders by issuing debt and instituting a massive buyback.
1) EBIX SEC filings
2) Morningstar 10 year data