⚖️ For Fairness Sake ⚖️ You can virtually do anything these days
A quick look at Pluralsight's fairness opinion
Pluralsight acquired by Vista for $3.5 billion
If you have ever said, I need to brush up on some Tech skills online, like Henriette and Nan in the video above, then Pluralsight, with over 6,500 courses focused on technology and 810,000 users, might be the place for you.
Trying something a little bit different today, as this is a little more preliminary look since the PREM14A with the fairness was just filed and we are missing some data that may get filled in. I will likely update this post as we get more data.
Pluralsight / Vista deal overview
On December 13, 2020, Pluralsight announced that it entered into an agreement to be acquired by Vista Equity Partners, in partnership with its institutional co-investors including Partners Group, who will acquire all outstanding shares of Pluralsight common stock for $20.26 per share in an all-cash transaction valued at ~$3.5 billion. The purchase price represents a premium of ~25% to the company’s volume weighted average closing stock price for the 30 trading days prior to the announcement.
Vista Fund VII has agreed to provide an equity commitment of up to $3.06 billion in cash, together with cash on hand at Pluralsight as of the closing of the mergers, to fund the aggregate merger consideration.
Update
March 08, 2021 - Pluralsight and Vista announced that they have entered into a revised definitive agreement under which Vista will acquire all outstanding shares of Pluralsight for $22.50 in cash through a tender offer.
The offer, which represents a best and final offer, is an 11% increase from the original $20.26 per share agreement and an ~38% premium to the volume weighted average closing stock price for the 30 trading days prior to the initial announcement of a transaction with Vista
As part of the revised transaction, there have also been waivers of certain payments owed under Pluralsight’s Tax Receivable Agreement (“TRA”).
Background of the merger
TL;DR: Aaron Skonnard, the CEO of Pluralsight, has known Vista since prior to the IPO, and had various discussions with them from time to time. Pluralsight stock crashed nearly 40% due to earnings on August 1, 2019 and never really recovered. Vista made an unsolicited approach on September 17, 2020, that did not discuss terms. Pluralsight hired Qatalyst as its financial advisor and started a strategic process. The negotiation of the TRA was another big piece of the puzzle, ultimately getting reduced from $406 million to $107 million, to make the deal work. At the time of the announcement, the company solicited 14 potential acquirers (consisting of six strategic acquirers and eight financial sponsors (including Vista)), of these, only Vista made a proposal that was capable of being accepted and the only other indication of value of a potential acquisition proposal (that did not materialize) was for an “implied ‘no TRA’ adjusted price” of no more than $20.00. Market rumors that Pluralsight was pursuing a potential sale, prompted unsolicited expressions of interest in pursuing a potential acquisition of Pluralsight, did not result in any acquisition proposals.
Potential bidders
Pluralsight has its niche in B2B IT training and with limited EBITDA, you either need a Strategic or a Sponsor who can write a big equity check. Besides Vista (Powerschool / EAB), you would think they reached out to Charterhouse (Skillsoft), Midocean (Global Knowledge), Adecco (General Assembly), Cornerstone OnDemand, Microsoft (LinkedIn Learning). Then to Sponsors who play in the EdTech or Software space like Francisco Partners (Renaissance), Silver Lake (Weld North), Onex (Powerschool), TPG (Ellucian), Leonard Green (Ellucian), Providence (Blackboard), Blackstone (Ascend Learning), H&F (former Renaissance / Ellucian), Advance Publications (Turnitin) and Veritas (Anthology / Rosetta Stone).
Offer timeline
The wringer
Pluralsight filed PREM14A on January 7, 2021 that contained Qatalyst’s fairness opinion. Qatalyst delivered an oral and written opinion to the BoD on December 11, 2020. The initial submission is missing a good amount of key financial data need to recreate the analysis, we will see if Investors sue to get more disclosure.
It is fair to Qatalyst who Pluralsight agreed to pay ~$45,000,000, $5,000,000 of which was payable upon the delivery of its opinion, and the remaining portion of which will be paid upon, the consummation of the merger. This works out to ~1.3% of the $3.5 billion enterprise value, which would probably be at the upper end of M&A sell-side fee tables.
For its fee, Qatalyst goes with the standard valuation methods.
Trading comparables (Management and Street)
Transaction comparables (Management and Street)
DCF
A few caveats before we begin diving into the numbers. I am not going to be able tie out all the share price ranges due to several factors:
Financials projections are rounded to the ones
No financial details other than Revenue, Operating Income, FCF, UFCF
Quarterly projections not provided
A full option schedule was not provided in any filings
We do not have the capped call cash settlement
No ability to calculate NPV of NOLs of value of TRA to Plurasight with disclosed data
What are the dilution adjustments to the UFCF in the DCF
Again, the old saying still applies, “you get what you pay for” and this is free. That said, we are in the ballpark for all analysis, so let’s dive in.
Valuation Summary
Is it Fair?
As my barber used to say, only God and the Delaware Courts can decide that.
Two large holders, Akaris Global and Eminence Capital, have already informed Pluralsight that they plan to vote against the proposed deal in its current form.
The company does not have positive cash flow, so you need a buyer to pay a large equity check, as leverage will be limited, which limits the universe of buyers
The offer price is below all the ranges Qatalyst chose for the analysis, but close to the top quartiles
Qatalyst choose relatively wide range of 59% - 133% of the implied share prices as compared to the offer price
Offer price is less than the 52 Week High for the period leading up to the announcement
Some research analyst target prices are above the offer price as well, even when discount a year
The acquisition multiple is below Software/SaaS industry average of ~18x NTM revenue and below the ~12x NTM revenue for the overall software industry, but you do need to take into considering the growth rate and margin profile of Pluralsight and the comps
There is a shareholder vote scheduled for March 2, 2021.
We will see how ISS and Glass Lewis respond to the offer as well in the near future.
Let me know what you think about the quick read version in the comments below.
Updates
Eminence Capital put out a presentation on why investors should vote no.
Pluralsight put out a presentation on why shareholders should vote for the transaction.
ISS recommends Pluralsight shareholders vote against proposed transaction with Vista Equity Partners
Glass Lewis recommends shareholders vote against the transaction.
Pluralsight put out an updated presentation countering ISS and Eminence.
Completion of the Offer
The Offer and any withdrawal rights expired as of one minute after 11:59 pm., New York City time at the end of April 5, 2021 an aggregate of 112,888,150 Class A Shares validly tendered and not validly withdrawn pursuant to the Offer, representing ~75.2 percent of the aggregate voting power of all issued and outstanding Shares as of the Expiration Time and 71.2 percent of all issued and outstanding Class A Shares and Class B Shares as of the Expiration Time, excluding (for purposes of both the numerator and the denominator of such calculation) any Class A Shares and Class B Shares known by Pluralsight’s Chief Executive Officer, Chief Legal Officer or Corporate Secretary to be held by a Company Excluded Party as of such time.
Management projected financials
The company has been experiencing headwinds including declining revenue growth, higher churn rates among smaller customers, and competitive pressure down market.
Valuation Summary
Discounted Cash Flow Analysis
Qatalyst performed a DCF analysis, as of December 31, 2020, by:
Adding the NPV of the Unlevered Free Cash Flows, for CY2021 - CY2024
Adding the NPV of a terminal value, calculated by multiplying UFCF of approximately $202 million in CY2025, by a range of next-twelve-months UFCF multiples of 20.0x to 35.0x
PV was calculated using a range of discount rates of 9.5% to 11.0%, based on an estimated weighted average cost of capital for Pluralsight
Subtracting the estimated net debt outstanding of Pluralsight as of December 31, 2020, as provided by Pluralsight’s management
Adding the present value of net operating losses, adjusted for dilution, as of December 31, 2020, as provided by Pluralsight’s management
Adding the PV of net Tax Receivables Agreement tax benefit to Pluralsight, calculated based on a model to calculate payments under the TRA provided by Pluralsights’s management, adjusted for dilution
Dividing the resulting amount by the number of FDSO (calculated utilizing the treasury stock method), which considers outstanding stock options, performance stock units, incentive units and restricted stock units of Pluralsight and Pluralsight Holdings as of December 9, 2020
Each of the above-referenced UFCFs and terminal value having also been adjusted for the degree of estimated dilution to current stockholders through each respective applicable period (which totaled between approximately 4% and 5% annually throughout the period covered by the Pluralsight prospective financial information as of October 2020) due to the estimated net effects of equity issuances and cancellations related to future equity compensation, based on estimates of future dilution provided by Pluralsight’s management
Based on the calculations set forth above, this analysis implied a range of values for Class A common stock of approximately $15.00 to $26.96 per share.
Selected Companies Analysis
Pluralsight lists the following companies in it s10K as competitors, only Cornerstone OnDemand is public.
The companies used in this comparison were selected by Qatalyst based on factors including that they are publicly traded companies in similar lines of business to Pluralsight, have a similar business model, have similar financial performance or have other relevant or similar characteristics.
Based upon research analyst consensus estimates as of December 10, 2020 and using the closing prices as of December 10, 2020 for shares of the selected companies, Qatalyst calculated, the fully-diluted enterprise value divided by the consensus estimated revenue for the CY2021, as shown below:
Qatalyst selected a CY2021E Revenue Multiple range of 5.0x to 8.0x
Qatalyst noted the CY2021E Revenue Multiple for Pluralsight was 7.0x
Applied this range to Pluralsight’s estimated revenue for calendar year 2021, on the Pluralsight October 2020 Financials and on the Street Case
Divided by the FDSO as of December 9, 2020, with in-the-money convertible debt treated on a net share settlement basis (excluding any make-whole shares or other change of control adjustments)
This analysis implied a range of values for of approximately $14.04 to $22.70 per share based on the Pluralsight prospective financial information as of October 2020 for calendar year 2021 and $13.41 to $21.73 per share based on the Street Case for calendar year 2021.
Selected Transactions Analysis
Qatalyst compared transaction multiples and selected financial information for thirty selected transactions. The transactions were selected as they are acquisitions of publicly traded companies in similar lines of business to Pluralsight or that have a similar business model, similar financial performance.
Qatalyst reviewed, among other things, (a) enterprise value as a multiple of the LTM revenue and (b) enterprise value as a multiple of third-party research analyst consensus estimates of the NTM revenue
Selected a range LTM Revenue Multiples of 6.0x to 11.0x
Applied this range to Pluralsight’s revenue (calculated for the twelve-month period ended on September 30, 2020)
Adjusted for cash and cash equivalents, the principal amount outstanding under Pluralsight’s debt as of September 30, 2020, cash settlement of capped call options assuming a closing of the mergers date of December 31, 2020, and funds to be paid at the closing of the mergers pursuant to the draft TRA amendment provided by Pluralsight’s management,
Divided by the number of FDSO as of December 9, 2020
This analysis implied a range of values of ~$12.77 to $24.44 per share.
Selected a NTM Revenue Multiple range of 5.0x to 9.0x
Applied these ranges to Pluralsight’s revenue (calculated for the twelve-month period ending on September 30, 2021) based on the Street Case
Adjusted for cash and cash equivalents, the principal amount outstanding under Pluralsight’s debt as of September 30, 2020, cash settlement of capped call options assuming a closing of the mergers date of December 31, 2020, and funds to be paid at the closing of the mergers pursuant to the draft TRA amendment provided by Pluralsight’s management, and on the number of FDSO as of December 9, 2020
This analysis implied a range of values of ~$12.05 to $22.71 per share.
Background of the Mergers
September 17, 2020, Mr. Skonnard attended a meeting with Mr. Saroya, at Mr. Saroya’s invitation. Prior to the meeting, Mr. Skonnard was not aware that Mr. Saroya would be raising a potential acquisition of Pluralsight, and indicated that Vista was potentially interested in acquiring Pluralsight. The terms of a proposed acquisition were not discussed, except that Mr. Saroya indicated to Mr. Skonnard following the meeting that Vista believed it could offer the highest value proposal among potential acquirors.
September 24, 2020, BoD discussed business as a standalone company including risks and uncertainties related to pursuing Pluralsight’s growth objectives, as well as the perceived need for substantial capital resources to pursue inorganic growth and other growth opportunities
September 26, 2020, Pluralsight entered into an engagement letter with Qatalyst
In the spring of 2020, following significant market disruption resulting from the COVID-19, the BoD had invited Qatalyst to attend two meetings to discuss perspectives on strategic positioning and opportunities, valuation considerations and trading performance
September 27, 2020, Qatalyst discussed various alternatives and considerations with respect to a potential outreach process to solicit interest based on those parties’ expected or previously expressed interest, ability to finance and consummate a transaction, and potential strategic rationale, including the potential for synergies
Outreach to six strategic acquirors and six financial sponsors
Nine executed CA’s, one strategic acquiror was already subject to CA
Two strategic acquirors declined to engage, citing that Pluralsight’s industry was not an area of focus for strategic transactions
Following DD, Four remaining potential strategic acquirors and two of the six financial sponsors declined to proceed with further discussions
The potential strategic acquirors and financial sponsors indicated concerns about strategic fit, limited overlap in buyer contacts, potential commoditization of content, pricing pressure, the level of investment required for integration, and concerns regarding the financial profile of the sales and marketing structure
October 9, 2020, Received an unsolicited inquiry from a financial sponsor (“Party D”)
October 14, 2020, discussed whether to reach out to additional potential counterparties
During October, Updated Pluralsight’s business plan based on third quarter 2020 results, ordinary course fourth quarter budget planning and review efforts for the 2021 fiscal year and the expected impact of the acquisition of DevelopIntelligence
October 16, 2020, Party D declined to participate in further discussions, indicated concerns regarding perceived headwinds including a potential slowdown in growth, net dollar retention and pricing pressure
October 18, 2020, Sent process letter to Party A, Party B and Party C requesting they submit a proposal for a potential acquisition on October 26, 2020
October 23, 2020, Party C declined to participate in further, citing perceived issues with Pluralsight’s growth and its competitive position
October 26, 2020, each of Party A and Party B also declined to participate in further discussions, citing perceived challenges to Pluralsight’s business, including the potential commoditization of content, the perceived efforts and costs required to make meaningful changes to the current cost structure given the potential declining growth profile as well as perceived concerns over the long-term margin profile of Pluralsight
November 2, 2020, discussed a potential amendment of the TRA, because by reducing the amount payable to TRA beneficiaries would deliver higher value to the Pluralsight stockholders
Qatalyst estimated aggregate accelerated payments of ~$400 million, with an increase of ~$6 million of aggregate accelerated payments per $1 increase in the price of Class A common stock
Qatalyst also discussed illustrative present value of the portion of the tax benefits that might be payable in the future to the TRA beneficiaries under the TRA absent a change of control. These illustrative present value estimates ranged from $112 to $144 million
November 4, 2020, members of the BoD and management confirmed, that conversations, regarding a rollover of equity in connection with a potential acquisition of Pluralsight would not be taking place during the negotiation
November 4, 2020, Received an unsolicited inquiry from a financial sponsor (“Party E”)
November 6, 2020, Vista delivered to Pluralsight a written proposal to acquire all the outstanding equity of Pluralsight for $16.50 and the full acceleration and satisfaction of obligations under the TRA in accordance with its terms, in an amount of approximately $406 million
Indicated that, to the extent the TRA payment is lower, the difference would be applied to the purchase price
If the entire amount of the $406 million payment were reduced to zero and applied to increase the consideration payable to equity holders on a dollar-for-dollar basis, Vista’s acquisition proposal implied a price of $19.02
Management and the BoD believed Pluralsight was more valuable than Vista’s $16.50 proposal, and they did not believe stockholders would be interested in an acquisition transaction at or near that amount, citing recent trading history
November 10, 2020, Qatalyst reviewed the results of Pluralsight’s solicitation of interest and the BOD recommended
Requesting another, higher value proposal from Vista
Seek to re-engage with Party A and Party B
Engage in negotiations with respect to an amendment of the TRA
November 10, 2020, Betaville Intelligence published an article indicating that Pluralsight may be in discussions regarding a potential acquisition by Vista
November 11, 2020, Party A could potentially, subject to completion of DD, submit an acquisition proposal with an “implied ‘no TRA’ adjusted price” of up to $20.00 per share of Pluralsight Class A to a proposed price per share of Class A common stock of less than $20.00, which reduction would be based on the aggregate amount of the accelerated change of control payment obligations under the TRA
Party A did not foresee any circumstance that would cause it to pay more than an “implied ‘no TRA’ adjusted price” of $20.00
Party B declined to submit any expression of interest or proposal
Party E was continuing to evaluate a potential strategic transaction
November 11, 2020, Vista verbally revised acquisition proposal of $17.75, assuming no reduction in the amount of the change of control payment obligation, which represented an “implied ‘no TRA’ adjusted price” of $20.32
November 11, 2020, Qatalyst and Wilson Sonsini proposed a fixed payment of $100 million in the aggregate to the TRA beneficiaries
November 12, 2020, Mr. Hinkle confirmed that he had been “walled off” from discussions of Insight Venture Partners and its affiliates, including the TRA Representative
Offered to recuse himself from discussions around negotiation of the TRA
November 13, 2020, Qatalyst provided Vista with a counter-proposal with an “implied ‘no TRA’ adjusted price” of $23.00 per share
November 13, 2020, the TRA Representative proposed an amendment to the TRA to reduce Pluralsight’s change of control payment obligations to 75% of the amount that would have otherwise been payable as a result of a potential acquisition of Pluralsight based on the then-current terms of the TRA (i.e., a reduction of 25%).
November 14, 2020, Directed Qatalyst to solicit from Vista its best and final proposal with respect to an acquisition
November 16, 2020, Party E was not able to further evaluate a potential transaction
November 17, 2020, Vistaverbally provided an updated acquisition proposal with an “implied ‘no TRA’ adjusted price” of $21.04 per share
Vista further increased its acquisition proposal to a best and final proposal with an “implied ‘no TRA’ adjusted price” of $21.05 per share, equating to $18.46 if there were no reduction in TRA
November 17, 2020, BoD shared with the TRA Representative Vista’s best and final price and indicate that the Transaction Committee would not be prepared to move forward with Vista unless the TRA Representative agreed to a reduction in the aggregate amount of the change of control payment obligations under the TRA to $127 million (representing a reduction of approximately $290 million, which is an ~70% reduction)
In line with the illustrative estimates of the PV of the amounts that might be payable in the future to the TRA beneficiaries under the TRA absent a change of control
November 18, 2020, Party A was not able to make a formal acquisition proposal at such time and did not envision any circumstances that would cause Party A to offer more than the “implied ‘no TRA’ adjusted price” of $20.00
November 18, 2020 Pluralsight would not move forward with Vista unless the TRA Representative agreed to an amendment to the TRA to reduce the amount to $127 million
TRA Representative agreed to an amendment to the TRA to $127 million
November 18, 2020, BoD recommended to move forward to negotiate definitive agreements with respect to Vista’s acquisition proposal for an “implied ‘no TRA’ adjusted price” of $21.05 per share, representing an acquisition price of $20.26 per share of Class A common stock and equivalents assuming a $127 million change of control payment obligation under an amended TRA
November 18, 2020, BoD unanimously agreed to enter into an exclusivity agreement with Vista until December 11, 2020
November 19, 2020, Vista delivered to Pluralsight an updated written proposal to acquire all the outstanding equity of Pluralsight for $20.26 per share and the payment of $127 million by Pluralsight in satisfaction of its change of control payment obligations under the TRA following the acquisition
December 11, 2020, Qatalyst delivered its oral opinion to the Pluralsight Board
December 11, 2020, following the meeting of the Pluralsight executed the merger agreement
No-Shop agreement
Termination fee of $104.6 million (~3.25% of equity value)