Description

I think Progress Software will get sold for ~20% to 40% more than the current stock price.

Background:

Phil Pead took over Progress after Jay Bhatt resigned as CEO in October 2012 after the sale of some non-core assets for $114 million. The company under Phil has continued to divest many of the early acquisitions and returned more than $300 million to investors via share buybacks. The key legacy product that exists today is OpenEdge.

OpenEdge is a proprietary platform with no easy substitutes.  From what we’ve learned, the company does a good job of taking care of app partners.  Growth has been very stable as most customers have been involved for a long time, and the company has seen fairly good growth with existing customers expanding their footprint.

OpenEdge is used by over 1,400 software vendors to write proprietary programs. As a result of these 1,400 independent software vendors, there are an estimated 4 million customers in over 180 countries who are using applications built on Progress software.  The beauty of this platform is that it is “sticky as hell” (former employee of Progress) as it is extremely difficult and time consuming to switch platforms so they almost never lose any customers. Every time one of those software partners sells a license to a new customer or receives a maintenance fee from an existing customer, Progress gets a royalty payment. This results in an extremely consistent and attractive set of cash flow streams. 

I have followed PRGS for a few years and have expected a sale at some point, and recently a number of signals came together at once to make me believe that the time is now:

• Phil Pead and Chris Perkins, the CFO, have done this twice already – selling Per-Se and Eclipsys.  Under Pead’s leadership Per-Se was a multi-bagger over approximately six years when it was sold.  When they took over Eclipsys later, it took about one year for them to sell the company for a large gain.  Selling companies is what Phil does.

• Phil and Chris both commute to work each week.  Phil has a home in Florida, and lives in an apartment in Boston while he is working.  This would suggest that this is not a permanent base for Phil as he has been involved with Progress for a while now.

• Longtime owners and activists, Praesidium Investment Management have recently upped their stake after purchasing a large block early this year.  Praesidium has a tremendous track record of owning tech companies that are later sold for large profits.  Preaesidium bought their shares recently at $23.85.

• Progress consistently repurchased shares for years until recently slowing the pace significantly.

• Reuters recently reported that the company is exploring strategic alternatives and has spoken to a small handful of private equity firms about a deal. The company has not confirmed anything.  I think that the company essentially giving a “no comment” limits the downside in case there is no deal – by not saying anything, the potential for a deal will be on the table until they deny it.  

   

Progress should do EBITDA north of $140MM in 2016, and using a 10-12x multiple on that figure (transactions in this space usually go for a few multiples higher) would put EV around $1,400MM and $1,680MM.  This would equate to a price between ~$30 and $35.  On the low end that’s a nearly 20% gain over a short period of time.  I have followed this situation for a few years and feel a sale would be the culmination of Phil’s work and believe it was the reason he was hired.  

Risks:

Overall equity and debt markets continue to deteriorate quickly over the next 3 months, and or debt spreads become materially wider. 

Disclaimer: The information contained herein reflects the views of the author as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. The author has an economic interest in the price movement of the securities discussed in this presentation, but the author’s economic interest is subject to change without notice. All information provided in this presentation is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition, there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over their use. This presentation is confidential and may not be reproduced without prior written permission from the author.

Catalyst

Sale of company.