Description

CLAC:

Investment Overview

We’ve found SPAC warrants to be systematically underpriced post deal announcement as investors focus on the asymmetric downside in a “no” vote situation, and use improper volatility assumptions, and believe the CLAC warrants (CLACW) fit this trend. Using relatively conservative volatility assumptions and appreciation in CLAC stock, we see ~150% upside in the warrants over the next year versus 25% downside if the fundamental story does not materialize.

Situation Overview

On 3/20 Capital Acquisition Corp III announced the acquisition of Cision, a global provider of cloud-based earned media solutions. The combined company will have an anticipated EV of ~$2.4bn implying a ~10.5x multiple of ‘17E EV/EBITDA and 9.2x ‘18E EV/EBITDA vs. peers at ~15.3x / 14.2x respectively. Capital is a SPAC run by CEO Mark Ellin, and this is the third SPAC acquisition the team has executed.  The first acquisition created Two Harbours (TWO), and the second acquisition creating Lindbland Expeditions (LIND). The TWO acquisition investment has grown from $119mn to more than $4.4bn and is the third largest mortgage REIT in the U.S. The LIND acquisition is still in the early innings as the transaction closed in July of 2015 so the verdict is still out.

What is Cision? Cision is a leading global provider of PR software services including content marketing, media monitoring, media list building, distribution and analysis. Cision is the go-to global Saas platform for communications professionals. When you listen to management describe the company they draw the parallel between what Bloomberg, or FactSet or CapIQ is to Finance professionals, or LinkedIn is to HR professionals, or Salesforce or SAP are to Sales Professionals, that is what Cision is to the Communications Professional. It’s the first platform they open when they get into work, and the last app they close when they leave the office.

The Communication industry is undergoing fundamental change as corporate CMO’s are transitioning their traditional marketing budgets away from paid media advertising towards the concept of “earned” media. In a recent Nielsen study, they found that consumers trust Earned Media more so than Owned or Paid Media yet corporate budgets continue to be focused on paid media as they are slow to pivot. Earned Media includes organic press coverage, social media posts, ratings/reviews, and online word-of-mouth. As advertising dollars’ pivot towards this medium Cision becomes a vital component of the communication professional’s suite so companies can track how effective their ROI is on this earned media spend. Cision is a leader in the $3 billion global communications intelligence software and services market with over $600 million of annual revenue generated from a complete platform of products covering each major PR category: media monitoring, analysis, database, and distribution. The Cision Communications Cloud™ (C3), is a reference platform for earned media. With an increased focus on influencer and audience data tracking, C3 delivers valuable analytics on end user reach and engagement, and ultimately attribute purchase data back to key sources.

Cision offers a comprehensive product suite of services to facilitate brand communication with key constituents and understand public perception.  The product suite includes a media database where users can filter for journalists, bloggers and influencers, while tracking interactions. The platform also has one of the more prominent media distribution outlets post last year’s acquisition of PR Newswire, which facilitates customers’ ability to execute campaigns, and distribute corporate news and events. The product suite also consists of media monitoring and media analysis services, which provide coverage of articles and content, alongside analytics on campaign effectiveness, sentiment, and perception.

Finally, Cision will have an impressive management team & sponsor post transaction. The PE firm GTCR has agreed to roll over their equity in the deal and will control ~52% of the shares outstanding pro forma. A portion of consideration to GTCR will be in the form of incentive earn out shares totally up to 6 million shares of common stock issued in 2 million increments when the combined company's stock price reaches $13.00, $16.00 and $19.00 per share. The CEO Kevin Akeroyd, built Oracle’s Marketing cloud prior to joining Cision and has 25 years of experience in digital, social, and mobile marketing. The CFO Jack Pearlstein has been the CFO of 4 GTCR backed companies (3 of which completed IPOs), including GTCR portfolio company Solera (SLH) which went public in 2007 and was taken private again by Vista Equity in March of last year.  GTCR has invested over $12bn since inception with portfolio companies including Solera, Zyo Group, Opus, and IQNavigator. The Technology end market is one of their 4 main investment verticals and GTCR is the largest equity investment ever for the fund which first invested in the company in 2014.

Financial Characteristics

In terms of financial characteristics, the SaaS delivery model has resulted in subscription and recurring revenue that represents ~82% of the total revenue base, with an 82% renewal rate, and the top 25 of 75,000+ customers representing just ~3% of revenues. Cision has significant FCF generation with ~87% of EBITDA converted to unlevered FCF which will result in rapid debt pay down. In 2016 pro forma for the PR Newswire transaction (completed in June of ’16) the company delivered ~$613mn of revenue. Management projects an ~8.2% CAGR in top line through 2021 with revenue growing from $613-$861mn, with this growth supported by the developments in the product suite described below. On this $613mn in revenue the company generated $207mn in EBITDA good for 33.8% EBITDA margins. On the back of the synergies from the PR Newswire transaction management expects EBITDA margin expansion of 57-bps from 206-2018 and believes the business can ultimately command low-to-mid 40% EBITDA margins.  

Given the attractive EBITDA to FCF conversion, and low CapEx intensity of the business management forecasts a ~14% CAGR in ’17-’21 FCF. This FCF generational will result in rapid debt pay down which should accrete value to equity holders, while providing management the ability to look at bolt-on acquisitions in the near term. At deal closure the company will be levered ~5.2x (4.6x including unrealized PR Newswire synergies). Management expects to delever by ~1.5x by year end ’18. Information Service peers have an average net debt/ ’18 EBITDA ratio of ~2.0x while enterprise software peers are in a net cash position, meaning CLAC will still have elevated leverage for the foreseeable future.

Growth Strategy

This management team is set to embark on a growth strategy that involves pivoting from today’s focus on PR Software and Services which the team pegs at a $3.0bn addressable market, towards a more comprehensive suite including the $32bn marketing and software industry, and longer term the $195bn+ digital marketing industry. This growth is consistent with how the industry is evolving as corporate CMO’s are becoming the largest technology buyer. As CMO’s focus on earned media, consistent with other industries they prefer a fully integrated PR SaaS platform as opposed to numerous point solutions. Management envisions leverage Cision as a platform by which they can execute strategic acquisitions to expand their footprint for adjacent capabilities and international markets, where both GTCR and Capital’s expertise will be important. Cision can look for bolt on M&A in user generated content, influencer performance, ratings and reviews, content marketing, and employee amplification.

Cision’s integrated cloud platform C3 launched in October of 2016 and is expected to drive higher ASP and total spend opportunity. The product has already been adopted by several of their larger enterprise clients. By year end ’17 the company envisions expanding their data analytics capabilities allowing customer to track customer spend, leads, sentiment, and engagement back to the source (influencer). Each influencer will have a unique ID where they can map relationships between the influence and their audience. Cision also intends to monetize its data that links to a specific brand, content, influencer, and reporter. For example Cision may be able to use the data to improve the impact of marketing campaigns for key clients like VZ, or CSCO. They also have the ability to enhance the data analytics capabilities of the likes of FB or Instagram by tracking these influencers and using that data to demonstrate the brand effectiveness on the individual platform. Longer term Cision management views the opportunity to expand into adjacent earned media categories such as ratings, reviews, content marketing, and user generated content.

PR Newswire Acquisition

In June of 2016 Cision completed the acquisition of PR Newswire and expects the transaction to result in ~$56.5mn of cost synergies. The company executed on $28mn of synergies in 2016 and expects the ability to reduce an incremental $11mn in costs in 2017 and $18mn in 2018+. These synergies are broken down into workforce rationalization ($47.7mn), facilities & IT ($8.4mn), other G&A ($6.2mn), and vendor consolidation ($4.3mn). While I don’t give them any credit for revenue synergies, management also expects the ability to generate in excess of $50mn in revenue synergies through cross-selling opportunities. Cision has over 13,000 U.S. Customers with PR Newswire having over 16,000 U.S. customers and there were only ~2,600 overlapping customers between the two.

Valuation

We look at Cision on a DCF basis as well as using comparable multiples on ‘18E EV/EBITDA (once the PR Newswire acquisition is completed and the company has had the ability to execute on their public market strategy).

Based on our DCF analysis we arrive at a value of ~$15.50 per share which would result in the warrants being worth ~$5.00 per warrant at this time next year using a blended average of peer implied vol assumptions and a 6/30/22 expiry date. This does not give management credit for expanding into tangential industries and limited incremental revenue from the roll out of the C3 platform.

Looking at comps in the information services industry (FDS, NLSN, and VRSK) they trade at a blended average of ~13.5x 18E EV/EBITDA and a ~4.5% FCF yield, with top line revenue growth CAGR of 6.0%, EBITDA CAGRs of 5.5%, and unlevered FCF CAGRS of 6.2% vs. CLAC implied at ~9.0x ‘18E EV/EBITDA, a ~10.5% FCF yield, with a 8.0% revenue CAGR, 13.5% EBITDA CAGR, and a ~14.0% FCF CAGR. While Enterprise Software Peers (AZPN, BLKB, INVO, MANH, MSTR, VRNT) trade at~15.5x ‘18E EV/EBITDA, and a 3.5% FCF yield, with a 5% revenue CAGR, 4.5% EBITDA CAGR, and 2% unlevered FCF CAGR

Ascribing 13.0x CLAC’s 18E EBITDA equates to ~$16.50/sh, which is a discount to the slower growth peers warranted for the increased leverage profile.   

Risks

As in any SPAC transaction there is the risk that the deal is not voted through by shareholders and in that scenario the warrants would be worthless. This fear is what creates the asymmetric opportunity.  Even transactions that have struggled to get across the finish line aka NXEO are ultimately voted through as the sponsor is incentivized at all costs to consummate the transaction and will work with shareholders to do so.

Catalyst

Deal closure of the transaction which should occur late May / early June. 

Continued roll out / development of C3 to the companies enterprise clients. 

Realization of PR Newswire Synergies 

Normalized trading for option models to utilize proper volatility inputs for CLACW.