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Tandberg ASA: Attractive stand-alone valuation with free bid optionality

|Includes: Tandberg AS (TADBF)

On 16 July 2009, Tandberg ASA (TAA NO - TADBF.PK), the Norwegian videoconferencing company, was rumoured again to have received an expression of interest from a private equity firm. This rumour follows last August's announcement that Tandberg was approached by a PE player. We believe that the PE player in question is Silver Lake Partners, a $10bn technology specialty fund, which is re-evaluating the deal it abandoned last year when the financing fell through: an acquisition of Tandberg would create significant synergies for Silver Lake, which already owns Avaya (a world leader in enterprise telephony) and is in the process of buying Nortel Enterprise Solutions. An addition of Tandberg to Silver Lake's portfolio would create a major player in the communication equipment and services market.

Despite its 10% share price appreciation to NOK 124 since the rumoured interest, Tandberg is still trading at a discount to both its own trading history and to Polycom (NASDAQ:PLCM), its closest competitor:
1) Tandberg has on average been trading at a 12 month forward EV/EBIT multiple of 13.5x since 1999. At a NOK 124 share price, Tandberg is trading at a 2010 EV/EBIT of 10.5x, a 20%+ discount vs its historical average multiple.
2) TAA’s multiple is currently at a 5-10% discount to PLCM’s (compared to a historical 2% discount): we believe this is unjustified as:
o    Back in 2006-early 2007, PLCM’s premium valuation was due to the numerous profit warnings and other bad news from TAA. Naturally investors chose to invest in PLCM and avoid TAA.
o    Since the start of 2008 the valuation premium/discount has been in the low single digits. PLCM’s larger potential market and cross selling opportunities diminish as convergence in the end market gathers pace. Thus it would make sense that PLCM’s premium valuation will be eroded as this opportunity set shrinks.
o    Stronger historical sales and EPS growth for TAA:  TAA 27% 5-year CAGR sales growth versus PLCM’s 15.3%, and TAA 21.1% 5-year CAGR EPS growth versus PLCM’s 18.6%.
o    TAA, with considerably higher margins, is forecast to grow faster than PLCM.

Given Tandberg's attractive stand-alone valuation and its exposure to the structural growth story of video conferencing equipment, Panta Capital recommends to go long Tandberg (hedged with either the Norwegian OMX Nordic 40 Market Index or with Polycom) under the NOK 120/share level, and receive the bid optionality for free.

Exposure: Long TAA NO