The board of Sophos has agreed to an all-cash offer from US private equity group Thoma Bravo. Sophos investors will receive $7.40 in cash per Sophos share. That is equivalent to 583p at the time of the announcement, however, the exact amount received by investors will vary depending on the exchange rate at the time of completion.
The acquisition price represents a 37.1% premium to the closing price before the deal was announced, and 45.6% premium to the six month average.
Sophos shares rose 36.8% to 581.9p following the announcement.
The Thoma Bravo offer still needs shareholder and regulatory approval - but with the three largest shareholders already on-board and no obvious regulatory conflict we see little chance of it falling at those hurdles.
The offer comes after a painful couple of years for investors. The group repeatedly missed guidance in 2018 and the shares took a pounding as a result. More recent results have stabilised the ship somewhat, but growth has been slower and investor confidence needs a lot of rebuilding. Against that background we suspect most investors will be grudgingly happy with the offer.
We would flag that the offer is denominated in dollars. If the recent volatility in sterling is anything to go by that means the final pounds and pence value of the deal could end up being significantly different to that reported today. If sterling weakens then that's good news for UK investors, but should a Brexit deal be agreed, a rally in sterling could leave investors out of pocket.
For those unwilling to stomach the volatility and who want to lock in the current price, it might make sense to sell the shares now rather than hold on until the deal completes. Of course that also rules out any potential benefit from a bump in price if there is a rival bid - although as yet there's no evidence of any other party showing an interest.
Assuming this deal goes through, holding Sophos shares will be more of a currency call than anything else. The decision of whether to hold the shares until the deal completes or not will depend mostly on individual investors' views of what the future holds and their appetite for risk.
First Quarter Results - 12 July 2019
Sophos has issued a trading update for the three months to 30 June 2019, the first quarter of its financial year.
New billings have returned to growth, and CEO Kris Hagerman described the period as an encouraging start to the year.
In a separate announcement, the group also confirmed the departure of CFO Nick Bray.
Revenue of $180.2m increased by 3% year-over-year ("YOY"), or by 7% at constant exchange rates. That reflects a 10% increases in subscription revenue, including a 78% underlying increase from the group's all-in-one partnerships with Managed Service Providers (MSPs). That progress more than offset the 11% fall in hardware sales.
Billings, which more accurately reflects the levels of business written in the quarter, rose by 9% at constant exchange rates driven by a 43% rise in the group's 'next generation' products, which now make up 54% of billings. The group's renewal rate was 118% in the period, compared to 115% in the prior year.
Adjusted operating profit rose 10% to $24.1m, which excludes the impact of a one-off exceptional restructuring charge. Net operating cash flow improved 34.7% to $54.4m, boosted by working capital changes.
The Author holds shares in Sophos.
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