Description

SoftwareOne is likely to go private for 20 CHF (+33%) or higher imminently. At 15x P/E and a double-digit earnings growth outlook that is benefitting from AI via MSFT Copilot and Azure royalties, downside is limited to 10% in the improbable downside case of SWON remaining public. 

Private VAR comps with lower margins than SWON consistently trade for 3-4x revs, while SWON lingers at 2.3x and priced 20% below its 2019 IPO price despite consistently solid (though slightly overpromised/underdelivered) operational performance.  

The three surviving founders own 29% and won a proxy fight to replace the board earlier this year on a “sell the company” platform that they have since reiterated. Recent press reports indicate a competitive private-equity auction taking place behind the scenes. Bain already bid to acquire the company three times last year between 18.80-20.5 CHF in conjunction with the SWON founders, but a misaligned old board rejected the approach. Whence the few remaining European funds with speculative merger arb books all got burned on this name multiple times last year, so now the spread to a higher-likelihood near-term bid is juicy.

Business

SWON is a value-added reseller of software with sustainable HSD organic growth and expanding 25% EBITDA margins. The real but unspectacular moat is a deep relationship with MSFT (as one of the top few distribution partners for 30 years), while on the demand side the European IT services market is less competitive than the U.S. with low customer churn. Minimal pricing pressure and offshoring labor allow SWON margins to continue expanding towards 30% EBITDA.

Investors have been concerned about MSFT revenue concentration (~50%) since the 2019 IPO, but without justification. SWON's take-rate on gross billings is expanding, for instance by earning $4.40/month from each Copilot seat (>10%) against the company's normal 2.5-5% net revs take-rate (depending on the level of the service contract or lower for pure license resales). SWON has signed up 600k Copilot users so far out of its 12.5m Office seats, beating all expectations and demonstrating the financial relevance of its AI opportunity. SWON has also diversified its offerings with meaningful lines in AWS, GCP, Adobe, Citrix, and Oracle.     

Treetop333 wrote this up in 2022, which is recommended for more background. I’m focusing on M&A developments since then, but the basic business overview is:

• Marketplace segment for digital software sales is >90% of total EBITDA with >50% margins, recurring SaaS
  • Services (IT support) is 6% EBITDA margin and bundled with the software
• 1.1bn CHF revs split 60% EMEA, 15% North Am, 15% APAC, 10% LatAm
  • Customers are primarily mid-size (~1bn CHF revs), with >5bn larger enterprises and government agencies also well represented
  • IT labor outsourced offshore to India, Manilla, Mexico
• Best US comp is CDW, although those margins are much lower because 75% of gross sales are hardware, which SWON avoids and delegates to partners
  • Best European comp is Crayon in Oslo (SWON owns 7% and has low Scandinavian exposure currently)

M&A timeline

• 6/23 Bain bids 18.50 CHF, supported by founders who will roll over their equity stakes
  • SWON board independent special committee rejects offer as insufficient
• 7/23 Bain group raises offer to 19.50-20.50 pending due diligence
• 10/23 Other three bidders drop out without founders’ support
• 1/24 Old board rejects Bain’s third bid (18.80 CHF), stock sells off 16.20 > 14.60
  • Low end of board's fairness opinion is >19 CHF
• 2/24 Founders announce proxy fight to force a take-private sale
• 3/24 Founders and Bain break cooperation agreement, which old board had cited as impediment to competitive auction
• 4/24 Founders win proxy vote despite ISS opposition. New board is two founders, two M&A lawyers, and an audit guy
  • “The founding shareholders continue to be convinced that the right conditions for SoftwareOne’s next phase of growth are best provided in a private context… and will examine the matter of a potential going-private transaction impartially upon their election”
• 8/24 Apax, Bain, and CVC all reportedly interested. Company gives lukewarm strategic update in Q2 earnings while cutting FY growth guidance 100 bps to 7-9%: “Discussions, although challenging given the general business environment, are progressing.”
• 9/24 Apax (>$65bn AUM) is considering buying both SWON and Crayon to merge, as both Reuters and Bloomberg reported. SWON is down >5% since that news, potentially due to misplaced fears about SWON remaining public and acquiring Crayon (which has appreciated 12%, is 60% smaller than SWON, and trades for slightly higher multiples).

Why?

Ostensibly, the main risk is an acquiring consortium of the SWON founders and private equity fund low-ball bidding (16 CHF?) while the company sandbags FY’25 guidance. I think this is extremely unlikely due to the underlying business momentum and because a Swiss merger would require two thirds of total votes (or 52% of non-founder votes), as spelled out in a legal opinion published by the company earlier this year. UBS Asset Management, Pictet, and Mawer are long-term shareholders with 17% of shares between them.

Considering the founders’ brutal 15+ month campaign to go private and increase their SWON wealth, it is also inconceivable that SWON would overpay to acquire Crayon as this would obviously cause a significant selloff and permanent minority discount. 

I think that the probability of all three private equity bidders walking away is <25%, since the founders are now even-handed neutral parties in control of the board and prepared to join the highest bidder. 

The macro environment is more beneficial with tech M&A heating up after three slow years and now large rate cuts. Smartsheet (33x EBITDA) is the most recent big example, but Perficient's $3bn EQT deal in May at 16x EBITDA is the notable quasi-comp. PRFT digital transformation/cloud migration consulting revenues are lumpier and less predictable than SWON's recurring SaaS royalties, PRFT margins are lower, and SWON organic growth has been higher.    

Leverage is <1x here despite the stable EBITDA. A margin headwind is that the Services segment typically grows faster than higher-margin Marketplace, but this effect has been outweighed by corporate-level cost cuts and operating leverage from ~70% contribution margins.

This is a good business that IPO'ed at a high multiple (22x P/E) and will be valued significantly higher by private equity than a provincial European exchange.

Catalyst

20 CHF take-private deal (3x revs, 11.5x EBITDA, 20x P/E)