In November 2014 broadcast graphics specialist ChyronHego entered into a definitive agreement to be taken private by Vector Capital in an all-cash deal that valued ChyronHego at an equity value of approximately $114m, or $2.82 per share.
Shortly thereafter, six lawsuits challenging the proposed acquisition of the company were filed in the Supreme Court of the State of New York, which were subsequently consolidated into a single case.
The consolidated case alleges that the company’s directors “breached their fiduciary obligations in connection with their approval of the Merger Agreement by entering into a transaction that is coercive and constitutes an unfair and inequitable subversion of shareholders’ rights, and that the entity defendants aided and abetted those breaches.”
ChyronHego and Vector Capital recently entered into a memorandum of understanding (MOU) with respect to a proposed settlement of case, and agreed to provide more information relating to the proposed deal to take ChyronHego private.
According to a recent filing with securities regulators, ChyronHego has now disclosed additional information regarding the proposed deal, including the following:
- Beginning in November 2013, ChyronHego’s board authorized ChyronHego’s President and Chief Executive Officer Johan Apel to explore ChyronHego’s strategic alternatives
- ChyronHego and Vector Capital entered into a confidentiality agreement in February 2014
- Discussions on the potential of ChryonHego’s management rolling over equity as part of the transaction did not occur with certain other interested parties.
- During a Special Committee (consisting of Independent ChyronHego Directors) meeting in July 2014, the Company’s bankers were informed “Mr. Apel was not happy being the Chief Executive Officer of a publicly traded company.”
- During the “go-shop period,” ChyronHego executives met with two interested parties, neither of which decided to make an offer
- Additional information was provided on the valuation metrics used in the Company’s analysis of the purchase price offered by Vector.
Excerpts from ChyronHego Definitive Proxy Statement
The broader proxy statement is a lengthy read covering the historical events leading to the proposed transaction, ChyronHego’s rationale for entering the transaction, and additional information on the perspective of the board and management.
Several excerpts are worth highlighting:
- Since November 2014, ChyronHego’s investment bankers contacted 85 potential buyers: 20 strategic buyers and 65 private equity buyers. Only nine potential buyers entered into confidentiality agreements to review more detailed materials. None submitted bids for ChyronHego
- In considering the merger, ChyronHego’s board noted the “significant increase in competition in competition in the broadcast graphics creation, playout and real-time data visualization industry over the past two years, which had led in some instances to pricing pressure and discounting on ChyronHego’s products and services, and consistent competition for clients and customers with other companies, such as Vizrt, that were increasingly well-capitalized.”
- The board had concerns on ChyronHego’s access to capital as a small, public company. “Members of the Board believed, based on their experience with the capital markets, that issuers with small market capitalizations and insignificant levels of coverage by investment analysts generally have a more difficult time raising meaningful amounts capital on terms that are not punitively dilutive to their shareholders.”
- ChyronHego provided the following financial projections to Vector Capital:
- Financing for the transaction will include a rollover of existing management shares in an aggregate value of $23.3 million, an equity contribution by Vector Capital of $49.3 million, a $50 million senior secured loan, and an up to $7 million of senior secured revolving credit loan.
Thoughts on Transaction
Taken together the disclosures outline a lengthy and thorough process run by ChyronHego’s board and management to seek a buyer or other strategic alternative for the company.
On the question of valuation, the market has spoken. As a reference, the transaction values ChyronHego at 19.2X LTM (last twelve months) EBITDA and 1.8x LTM revenue. A review of the public disclosures referenced above offers sensible statements by the board and management on concerns of access to greater resources, competitive positioning, and disadvantages of remaining public.
However, shareholder frustration is understandable given the proposed take-private price per share is lower than the 52-week high stock price.
Moreover, the company had previously communicated growth levels and market sizing estimates inconsistent with observable data points in the broadcast technology sector.
For example, the chart below is from ChyronHego’s March 2014 investor presentation, which was still on the company’s website at the time of writing, implies that company believes its addressable market is more than $1 billion.
On ChyronHego’s Q2 2014 earnings call, CEO Johan Apel confirmed management’s view that the total addressable market was approximately $1 billion, comprised of $250m of broadcast graphics products, and $750m of services. This reiterated estimates made by previous management about the company’s addressable market on its Q2 2008, Q4 2011, and Q2 2012 earnings calls.
However, it is reasonable to conclude ChyronHego was in the process of communicating updated expectations of growth and market sizing. To their credit, management had already reversed ground and communicated the need to seek other approaches to generate increased in shareholder value. This led to a series of M&A transactions responsible for substantial all of ChyronHego’s recent growth.
Shareholders will vote on the proposed take-private deal at a special meeting of the company, which is scheduled to be held on March 6, 2015.
In the third quarter of 2014, ChyronHego posted a net loss of $2.6m on revenue of $14m. During the first nine months of 2014, ChryronHego posted a net loss of $2.8m on revenue of $43.3m. For the trailing twelve months (TTM) ended September 30, 2014, ChyronHego had revenue of $58m, comprised of $27.2m of product revenue and $30.8m of service revenue
Assuming the transaction closes, it will be interesting to track developments of ChyronHego with its new owners Vector Capital.
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