ICG Group: Procurian Divestment Creates Pure Cloud Player Trading At Low Multiples

Oct. 4.13 | About: Actua Corporation (ACTA)

Shares of ICG Group (ICGE) spiked on Thursday after the company announced the divestment of Procurian to Accenture.

After the divestment of the procurement solutions specialist, the company will be fully focused on its cloud-based activities. Yet those activities look undervalued at the moment, trading at just 3.5 times expected annual revenues.

Even when applying reasonably conservative valuation multiples to the business I arrive at a price target of at least $20 per share, suggesting there is more upside left for shareholders at the moment.

The Deal

ICG Group announced that it has entered into an agreement to sell Procurian, a specialist in procurement solutions, to Accenture Plc (NYSE:ACN). ICG stands to receive $375 million in cash, subject to closing adjustments.

The deal is subject to normal closing conditions, including regulatory approval, and is expected to close in the fourth quarter of the year. Net proceeds from the sale are seen around $324 million, as a portion of proceeds will be held in escrow claims, being subject to potential indemnification claims.

Pure Play

Following the deal ICG will be a pure-play cloud company, with strong positions in the public sector, compliance and insurance business.

ICG remains focused on the growth opportunities in the cloud company, which is expected to outpace growth in the wider software industry.

To offset dilution from the divestiture, the board of ICG has expanded the size of the share repurchase program from $50 million to $150 million, leaving another $114 million in repurchases authorized at the moment. This is sufficient to retire roughly 20% of the shares outstanding at the moment.

Valuation

ICG ended its second quarter with $89.0 million in cash and equivalents. The company operates with $34.9 million in total debt for a net cash position of around $55 million.

Revenues for the first six months of the year came in at $95.0 million, up 27.7% on the year. The company reported a $12.2 million profit after taking a profit of $27.7 million on discontinued activities.

At the presentation of the results the company guided for annual revenues of $210 to $220 million, and close to flat non-GAAP earnings.

Trading around $15 per share, the market values ICG around $570 million. This values the company's operating assets at around $515 million before considering the impact of the deal. This values assets around 2.4 times annual revenues, inclusive of the Procurian activities.

Some Historical Perspective

Investors have cautiously applauded ICG's strategy to focus on the cloud. Shares rose from levels around $4 in 2009 to $13 by 2011 on high hopes for the cloud strategy. Shares fell back toward $10, but are now exchanging hands north of $15 per share on the back of the deal.

Between 2009 and 2012, ICG has nearly doubled annual revenues to $166.6 million over the past year. The company has been reporting GAAP profits during each of those years.

Investment Thesis

This deal marks a huge transformation for ICG Group. The company generated revenues of $95.0 million in the first half of this year, from which $25.5 million were cloud revenues, implying that Procurian's revenues were $69.5 million.

Last year, Procurian generated $140 million in revenues, implying that the $375 million deal values the business at 2.7 times annual revenues.

This leaves just the cloud business including Govdelivery, MSDSonline and Bolt, which generated revenues of $25.5 million in the first half of this year. This compares to revenues of $26.6 million for the full year of 2012. Applying conservative growth rates to the cloud business for the second half of the year and cloud should be able to generate annual revenues of around $55 million this year.

At the same time the current market capitalization of $570 million is largely based on cash. Adding the net process of roughly $325 million to the current net cash position of $55 million leaves ICG with $380 million in cash. This means that the current valuation attaches $190 million in value to the cloud business.

Therefore the cloud activities are valued around 3.5 times annual revenues, which seems not a lot compared to some other names acting in the hot cloud area. Note that cloud revenues stand to roughly double this year, partially aided by acquisitions. Striping out the effect of acquisitions results leaves a still very impressive 37% organic growth rate.

Even when attaching a more conservative 7-8 times annual revenue multiple to ICG's cloud business, a valuation of around $8800 million including cash should be attainable, representing a price target somewhere in the low twenties.

Therefore investors should be happy with the share repurchase program, which if executed at these levels will create only more value. I see room for shares to move toward $20 per share before the end of the year on the back of this nice deal, unlocking the value of the cloud.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ICGE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.