Special Committee Allowing Thoma Bravo to Steal Magnet Forensics For Lowest Premium It Has Offered in 14 Year Deal History

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Mar 08, 2023, 12:47 ET

Thoma Bravo has a Proven Ability to Pay and Should Pay More for Magnet Forensics, the Fastest Growing AND Highest Quality Public Company that it has Ever Attempted to Acquire
Nellore Believes Important Analyses were Omitted
Nellore Continues to Believe Intrinsic Value is C$60 – C$70
Shareholders urged to Vote the GOLD Proxy AGAINST the Takeover of Magnet Forensics

PALO ALTO, Calif., March 8, 2023 /PRNewswire/ - Nellore Capital Management LLC ("Nellore"), the largest holder of subordinate voting shares ("SV Shares") of Magnet Forensics Inc. (TSX: MAGT) ("Magnet"), today issued a public letter urging all Magnet shareholders to use to GOLD proxy to vote AGAINST the proposed transaction with Thoma Bravo. The full text of the letter follows:

Dear fellow shareholders,

(CNW Group/Nellore Capital Management LLC)

As you know, Nellore Capital Management strongly believes that the C$44.25 price Thoma Bravo is offering for Magnet Forensics is insultingly low. More recently, we studied the last 14 years of Thoma Bravo's deal history and are more convinced than ever that we SV shareholders are practically being robbed in this deal. Vote AGAINST using the GOLD proxy

The proposed acquisition of Magnet would represent the lowest 1-day unaffected premium ever offered by the PE firm, for the fastest growing and highest quality of all of its targets. In a take private transaction, the premium over the current share price represents a one-time payment from the buyer for all of the future return that the seller is being asked to forego. The higher growth rate and free cash flow margin, the higher the rate of return that the seller is being asked to part with.

Yet, somehow, Thoma Bravo has negotiated a transaction where it is offering the lowest premium for the asset with the highest rate of future return. While we can't blame Thoma Bravo for pursuing the best deal for itself, we are very concerned that the Special Committee has not done its part to protect and preserve value for us, the SV shareholders.

Using publicly available filings, we read every fairness opinion and spread management projections for 34 take private transactions going back to 2009. We observed that Thoma Bravo typically pays a significant premium for slower growth companies that need operational fixing. Magnet is growing quickly and needs no help.

Further, Thoma Bravo most recently raised US$32bn, 42% higher than their US$22bn fundraise in October 2020. The mean and median premium paid since their October 2020 fundraise, excluding Magnet, are 47% and 37% across 16 take privates. Most importantly, they have a strategic asset in Grayshift, increasing their ability to pay. Yet, here we are:

We have never seen a Board try this hard to discredit the high growth, cash generative characteristics of their own business. Usually, Boards trumpet those strengths. In every prior transaction where the target has significant free cash flow margins and rapid revenue growth, value is contemplated on methodologies that appropriately adjust for the growth and margin characteristics. Not in Magnet's case, where only absolute revenue and EBITDA multiples, as opposed to growth adjusted revenue and EBITDA multiples, are used. FCF multiples, absolute and growth adjusted, are omitted all together.

Accordingly, we implore the Special Committee to:

incorporate FCF and growth adjusted FCF multiples in Discounted Equity Analysis, Precedent Transaction Analysis and Public Comparable Analysis
if the Board insists on using revenue multiples, please adjust the revenue multiples for growth and quality

The Board of PluralSight conducted such an analysis, by using the Rule of 40 (NTM revenue growth + NTM FCF margin) to adjust revenue multiples for quality (on pg 25): https://www.sec.gov/Archives/edgar/data/1725579/000119312521034420/d118407ddefa14a.htm

The analysis indicates that the appropriate NTM revenue multiple for a Rule of 60 company is 15x, or C$67 per share for Magnet.

The Board of Zendesk performed an illustrative present value of future share price analysis each of the fiscal years 2022 through 2024, by applying enterprise value to growth-adjusted EV/NTM revenue multiples adjusted using NTM revenue growth (on pg. 55): https://www.sec.gov/Archives/edgar/data/1463172/000114036122028748/ny20004637x3_defm14a.htm

conduct and include a premia paid analysis as is customary in take private fairness opinions (and is conspicuously missing in both of your fairness opinions)

We also believe that the Special Committee, or at least its advisors, are aware of the analyses we suggest above and have intentionally omitted them. We can see that they are part of a standard package of analyses presented to every Board and were conducted by the same advisors for KnowBe4¹ and QAD² based on publicly available fairness opinion presentations.

Consider that the current premium offered of 15% can't even compete with 5 months of Magnet's standalone growth. If we were to apply Magnet's unaffected NTM revenue multiple from post Q3 earnings to pre deal announcement of 8.6x and apply it to NTM revenue per Management Forecast as of June 30^th, 2023, the stock would be trading at C$47. Using the unaffected NTM EBITDA multiple, it would be at C$54. And this is without a control premium. If we were to apply Thoma Bravo's median premium of 37% since October 2020, we would have a range of C$64 to C$74. We cannot let a transaction this egregious to us minority shareholders proceed.

Momentum is building against the transaction, as shareholders lineup to vote AGAINST, but we can't stop now. We have the power to preserve the value of our investment - vote AGAINST this unfair transaction using the GOLD proxy.

Sincerely,

Sakya Duvvuru
Founder & Portfolio Manager
Nellore Capital Management LLC

About Nellore Capital Management LLC

Nellore Capital Management invests in entrepreneurially managed, competitively advantaged technology businesses globally for the long term.

¹ https://www.sec.gov/Archives/edgar/data/1664998/000119312522307513/d323857dex99cii.htm pages 19, 22, 23

² https://www.sec.gov/Archives/edgar/data/1036188/000110465921098605/tm2122038d5_ex99c-ii.htm pages 12, 23

SOURCE Nellore Capital Management LLC