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With Growing Momentum to the Stop Magnet Forensics Takeover, Nellore Summarizes Campaign and Urges Shareholders to Vote AGAINST on the GOLD Proxy
[March 16, 2023]

With Growing Momentum to the Stop Magnet Forensics Takeover, Nellore Summarizes Campaign and Urges Shareholders to Vote AGAINST on the GOLD Proxy

PALO ALTO, Calif., March 16, 2023 /CNW/ - Nellore Capital Management LLC ("Nellore) today issued another public letter urging all shareholders of Magnet Forensics Inc. ("Magnet") (TSX: MAGT) to use to GOLD proxy to vote AGAINST the proposed C$1.8 billion takeover by Thoma Bravo.

Nellore believes that shareholders should be aligned with the independent proxy advisor Glass Lewis, which recommended rejection of the takeover citing "inadequate valuation." Nellore's news release on the Glass Lewis report is available here. If you have already voted another proxy, you can still vote the GOLD proxy AGAINST the takeover. Only the later-dated vote will be counted.

The full text of the letter to shareholders follows:

Dear Fellow Shareholders,

With only a few days left to vote, and with growing momentum to stop the unequal and underpriced takeover offer for Magnet, I urge you to join me in the campaign AGAINST the "take under" transaction of C$44.25 per subordinate voting ("SV") share.

I am the founder and portfolio manager of Nellore, the largest holder of SV shares of Magnet. Magnet is a special business, exhibiting financial characteristics that put it in the top 1% of all publicly traded software businesses, and that is why we are proud to be the largest outside shareholder. You can imagine my disappointment when we woke up on January 20th to see our shares being acquired for a very low price and all of the upside in which we hoped to participate for years to come gone.

Other shareholders, with approximately 2 million SV shares between them, also oppose the takeover. When combined with Nellore's 1.3 million SV shares, we are nearly there. But we need your help to get us across the line and ensure that SV shareholders receive FULL VALUE and FAIR TREATMENT for our investment in Magnet.

Time is running out, so you need to vote today to ensure your vote is counted at the Meeting of Shareholders. The deadline to vote is Monday, March 20 at 5pm Toronto time.

Here are the top 10 critical reasons to vote AGAINST:

  1. Magnet is worth C$60C$70 in our estimation, much higher than the offer price of C$44.25. For a dominant vertical software business growing revenues 41% with 33% free cash flow margins, C44.25 is too low, 9x 2023 revenue is too low and 19x 2024 FCF is too low.
  2. The Rolling Shareholders, the insiders, have negotiated a different and better deal for themselves. They have the exclusive right to roll most of their shares into the takeover and profit from the future upside of not only Magnet itself but also he synergies of combining with Grayshift.
  3. Jim Balsillie, an Independent board member and Chairman of the Board, was (based on Magnet's own disclosure) initially given the same treatment as we SV shareholders, but he apparently negotiated to become the third Rolling Shareholder. His rollover was not required in Thoma Bravo's initial proposal, and he is also not a company executive. His choice of the Rolling Shareholder option, despite potential blowback for abandoning minority shareholder interests, is very powerful indication that it is worth much more than the cash offer of C$44.25.
  4. The Special Committee ran a flawed sale process where it only contacted two other financial sponsors about selling Magnet, despite a growth rate and margin profile that would put it in the top 1% of all publicly traded software companies measured by Rule of 40 (revenue growth + free cash flow margin sum to at least 40. Magnet's total is 74!).
  5. Magnet announced stellar Q4 results last week. It beat its own management forecast that was shown to Thoma Bravo in Mid-November by 3% and significantly exceeding consensus estimates, including Q4 revenue by 6%, EBITDA by 61% and free cash flow by 104%. We believe if there were no takeover bid, the stock would be trading higher than C$44.25. See commentary below from the investment banks that agree with us.
  6. Despite exceeding consensus estimates by such a wide margin, the company continues to justify the current offer price based on those outdated consensus estimates. As recently as the mail that went out on Monday, March 12th, Magnet highlighted the attractiveness of the transaction based on multiples that reference consensus estimates as of January 20th, which we believe is incredibly misleading!
  7. Thoma Bravo is offering its lowest ever premium of 15% over an unaffected stock price despite Magnet being the fastest growing, highest quality asset Thoma Bravo has ever attempted to acquire. Thoma Bravo also already owns a strategic asset in Grayshift, further increasing its ability to pay. Instead, 15% is far lower than their median of 37% premium across the last 16 deals.
  8. The Management Circular has omitted many analyses that would highlight how low the current offer price is, including premia paid analysis, growth adjusting and margin adjusting the revenue multiples, free cash flow-based valuation methodologies
  9. The transaction is timed opportunistically. If it was announced after Q4 results, our expectation is that it would have resulted in a materially higher price to SV shareholders. The record date was also set for before the Management Forecast or Q4 results came out, both of which are important data points for shareholders to make a decision about whether they want to vote for the transaction or not.
  10. We expect, as do many industry and press sources, there to be a re-IPO of Magnet+Grayshift. If it happens in 9-12 months, we expect our shares to be worth roughly C$89 each, or double what we are being offered. If it happens in two years' time, roughly C$110.

In addition to Glass Lewis, other market participants are becoming more vocal about the unfairness of the current offer, including RBC and Canaccord Genuity: 

"An awkwardly stellar quarter from the company being taken private, no conference call this AM. Revenue +45% yoy to 31mm, above cons at 29mm. Beat 7% above cons compares to avg of 5%. ARR also strong, 50% yoy to 92mm above est at 88mm. EBITDA also strong at 9.5mm above cons at 6mm. Strong results reaffirm that purchase price too low for investors. Vote is in a week and a half, will see what comes out." – RBC

"Q4 results were outstanding again and would normally have led to a big jump in the shares if this was still trading on fundamentals.  Remains secondary to the ongoing takeover bid from Thoma Bravo." – Canaccord Genuity

Vote for Your Financial Interest

I urge you to vote for your financial interest and stop this unequal and underpriced takeover. In the absence of equal and fair treatment, shareholders must vote the GOLD proxy AGAINST until we are all offered a price sufficient for the bright future with which we are being forced to part.

If you have any questions at all regarding the transaction or how to vote, please don't hesitate to call me at (501) 551 0128 or to email me at [email protected].  


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.

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SOURCE Nellore Capital Management LLC

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