Nellore's Final Remarks: The Facts Just Don't Add Up, Vote AGAINST

Nellore's Final Remarks: The Facts Just Don't Add Up, Vote AGAINST

PR Newswire

  • Magnet is Continuing to Justify the Transaction Based on Outdated, Misleading Information
  • Four Software Takeovers at Higher Premiums Since Magnet's Takeover Announcement
  • Nellore Urges Shareholders to Follow Leading Independent Proxy Advisor Glass Lewis' Recommendation AGAINST, Comments on ISS
  • Nellore Suggests Shareholders Read Recent Notes From Brokers Quoted by Magnet

PALO ALTO, Calif., March 17, 2023 /PRNewswire/ - Nellore Capital Management LLC ("Nellore) today provided final commentary to explain its opposition to the proposed C$1.8 billion takeover of Magnet Forensics Inc. ("Magnet") (TSX: MAGT) by the private equity firm Thoma Bravo.

Sakya Duvvuru, Founder and Portfolio Manager of Nellore Capital, said "the Software PE market continues to be strong and Magnet stands out as an especially weak negotiation in comparison. The presentation put out today by Magnet is further proof that the Special Committee doesn't understand the value of the company, which continues to be justified by outdated and misleading information."

Ending Where We Started: Magnet is a Special Business Creating Continued Shareholder Wealth

Magnet's operating and financial model are such that roughly every 4 years, revenue converts into free cash flow ("FCF"). For instance, the company generated US$27mmof revenue in 2018 and generated US$33mmof FCF in 2022. The company generated US$50mmof revenue in 2020, and per Management Forecast, expects US$65mmof FCF in 2024. The company is expected to generate the equivalent of 2022 revenue, US$99mm, in 2026 FCF -> a compounding machine! Thus, one could pay up to 20x 2023 revenue (>100% above current offer price), and still earn a double digit return over 4 years.

Materiality of Q4 FCF on Realizing Fair Value

It seems like Magnet (and its Special Committee) are either not aware of, or don't appreciate, how FCF can drive returns for the buyer. Consider that by waiting for March 9th instead of January 19th, Magnet's Last Twelve Months ("LTM") FCF doubles, and at the offer price, is actually trading 13% below the average over the last twelve months!


EV / LTM FCF (CNW Group/Nellore Capital Management LLC)

This is especially significant because the last twelve months have been especially punitive toward high growth, technology companies. Yet, here we are with an offer price that is below the average in that punitive period. Applying the unaffected average of 43x on LTM FCF post Q4 results and Thoma Bravo's 37% median premium results in a offer price of C$60 per share. Or, using the unaffected stock price on January 19th of C$38.15, we derive a multiple of 32x LTM FCF. Using the same multiple on 2024 FCF and discounting back to today, we get to C$60 per share.

Further, using the same methodology Magnet uses on slide 3 of today's presentation to justify the transaction, we can see that not only is Magnet not trading at 56x estimated 2023 FCF, it is trading at just 38x twelve months trailing FCF and well below the peers:

EV / LTM Free Cash Flow

EV / LTM Free Cash Flow (CNW Group/Nellore Capital Management LLC)

Not only is there no control premium here, Magnet consideration is not even at the level of transaction unaffected, slower growing, lower margin public comps. Applying the median multiple of peer group results in a stock price of C$66. Applying a further control premium results in a price >C$80. The Special Committee should have understood this and negotiated using this information.

Four Software Takeovers at Higher Premiums

Since the Magnet transaction was announced on January 20th, takeovers by private equity ("PE") firms have been announced for four other public software companies with one-day unaffected premiums ranging from 29% to 62%. Clearly, the 15% premium for Magnet is far too low.

Notably, three of the takeovers were announced just this week, highlighting the underlying demand for recurring revenue and software business models even in the face of Silicon Valley Bank issues and general macro uncertainty. Further, the size of the deal values, the variety of players investing, and the unaffected premiums paid all highlight the vibrancy of the Software PE market.

Unaffected Premia




Deal Value

of 40




     Sumo Logic

Francisco Partners


15 %

57 %

50 %

Post SVB / SBNY:





10 %

46 %

51 %



Silver Lake + CPP


33 %

62 %

73 %





28 %

29 %

54 %


22 %

49 %

57 %


22 %

52 %

53 %


Magnet Forensics

Thoma Bravo


74 %

15 %

12 %

Moreover, high growth, high quality software companies Kinaxis and Docebo have both reported strong earnings in the last two weeks and are both trading above their pre-earnings reports. Cellebrite is also trading up 15% since its strong Q4 report.

Don't fall for Magnet's downside risk scare tactic. To the contrary, Nellore believes the stock will start to price in US$65 million of FCF in CY'2024 and trade above the deal price.

Comments on ISS

We believe even the cautionary support recommendation from ISS is not warranted. We can just agree to disagree about the significance of Jim Balsillie choosing the Rolling Shareholder option, procedural depth of the market check of reaching out to just two financial sponsors, the differential consideration and the lack of value for Grayshift synergies for SV shareholders. But we will not let the following ISS assertions go unchallenged:

Valuation methodologies:

  • ISS claimed "it is not illogical or unprecedented to think about software transactions through a FCF multiple lens, and such an approach would likely ascribe a higher intrinsic value to MAGT. However, there is not enough evidence to conclude that the valuation supporting this transaction was not credible"; The facts below indicate that the supporting valuation is not credible
  • We believe that you do not HAVE to use FCF multiples as a valuation methodology, but methodologies based on other financial metrics, especially revenue, require more careful consideration of growth, margin, and quality characteristics in the reference range
  • As Glass Lewis points out, the issue is not the methodology chosen but the "the multiples applied by MS here are substantially misaligned with the Company's stand-alone trading patterns (e.g. application of 2.5x and 4.5x 2023 revenue multiples, despite the Company's average NTM revenue multiple of 7.0x in the one-year prior to announcement and while trading at NTM revenue multiple of 8.9x on market close the day prior to announcement; we see similar discrepancies with respect to NTM EBITDA)."
  • ISS specifically points to Datto's fairness opinion as lacking FCF-based valuation methodologies. That is true but they use an EBITDA range of "16.0x – 30.0x" and highlight "unaffected EBITDA Multiple for Datto was 23.2x"
    • If Datto deserves 16-30x for a 20% revenue grower and the unaffected multiple was 23.2x, then how about Magnet? Magnet's reference range is 22.5x – 27.5x for a 35% grower and the unaffected multiple prior to announcement was 42.0x, 53% above the high end of the range.
  • Similarly, the "unaffected Revenue Multiple for Datto was 5.4x based on the Analyst Projections" and the financial advisor's range for Datto's fairness opinion was "4.5x to 7.5x."
    • Again, Magnet is a 35% grower versus 20% for Datto and only gets 2.5 – 4.5x, while the unaffected multiple is 8.9x.
  • Lastly, we believe Independent Valuator's otherwise pristine DCF analysis is also flawed by a poor terminal value assumption, which again doesn't jive with reality: "considered the implied terminal enterprise value to LTM revenue multiple, which ranged from 2.1x to 3.0x, and the implied terminal value to LTM EBITDA multiple, which ranged from 7.5x to 10.6x"
  • In the end, we just believe that it is easiest to look at FCF, since Magnet consistently produces it, but we are open to the appropriate Revenue and EBITDA multiples, as long as they are adjusted for growth rates, margins and cash flow generation

Standalone Path:

  • Worth repeating that only 60% of Magnet's business concerns Public Safety, Grayshift is not relevant to the Private Sector business.
  • Within the Public Safety business, the vast majority of customers REQUIRE dual sourcing or triple sourcing extraction vendors. CEO says so himself on 08.02.22 at the CG conference
  • It has been over 8 months since Magnet lost Grayshift to Thoma Bravo and changed their friendlier GTM partnership structure, Magnet has reported two of its strongest quarters ever
  • Further, Cellebrite is also available as a mobile extraction M&A target, and is available at a similar enterprise value as Grayshift. Lastly, Grayshift has a heavy debt load and has a very small revenue base – are they really going to pose a threat to Magnet's Artifact Library? I think Thoma Bravo/Grayshift needs Magnet more than Magnet needs Grayshift

Share Price Volatility:

  • ISS claims "Magnet share price was volatile and lost ground in late 2021 and early 2022 – Magnet fell 76.4 percent from its all-time high to its all-time low closing price (Aug. 31, 2021 to June 16, 2022)"
  • Nellore considers that period in July to September 2021 to be driven by non-fundamental buying in a very tight float, immediately post IPO. The Board agrees given their call out of the "No News" press release released on 08/31/21 on Slide 12 of the February 10th presentation
  • Thus we believe that ISS should only consider the period of trading following Magnet's secondary transaction on December 14, 2021. Abiding by this ourselves, we start our EV/LTM FCF analysis starting on January 1, 2022

Comments on Research Analyst Commentary

The tone of the analyst community has moved significantly toward our favor since our initial press release on February 9th, the release of the management forecast on February 22nd, and finally the release of Q4 results on March 9th. Even so, Magnet again continues to highlight research reports from January 20th despite more recent commentary from the same institutions.

  • RBC, March 9th: "Solid Q4 adds fuel to the takeout debate" "Strong results reaffirm that purchase price too low for investors."
  • CG, March 9th: "Outstanding Q4 ahead of the March 23 vote" "Q4 results were outstanding again and would normally have led to a big jump in the shares if this was still trading on fundamentals."
  • NBF, March 9th: "standard beat from Magnet and given the Company is in the process of a takeover, the only thing the results would do is to add further uncertainty to the shareholder vote"

Nellore Capital Signing Off: Protect Your Interest, Vote AGAINST

Nellore is the only party that is 100% aligned with its fellow SV shareholders. We are sincerely trying to present the facts as they are and attain full value for all of our Magnet shares. 

Nellore continues to urge shareholders to use to GOLD proxy to vote AGAINST the proposed takeover.

If you have already voted another proxy, you can still vote the GOLD proxy AGAINST the takeover. Only the later-dated vote will be counted. The voting deadline for the GOLD proxy is Monday, March 20 at 5pm Toronto time.

About Nellore Capital Management LLC

Nellore Capital Management invests in entrepreneurially managed, competitively advantaged technology businesses globally for the long term.

For further information:

Investor contact

Sakya Duvvuru, Founder & Portfolio Manager, Nellore Capital Management LLC, Ph: 501-551-0128, Email: [email protected]

If you require assistance with voting your shares, please contact Carson Proxy Advisors:
North American Toll Free Phone: 1-800-530-5189; Local (Collect outside North America): 416-751-2066 Email: [email protected]

1 Based on closing stock prices as of March 16th, 2023, except for Magnet at offer price of C$44.25. FCF is defined as Cash Flow From Operations less Capital Expenditures and Capitalized Software.

2 In good conscience, we couldn't bring ourselves to include TDC as a comparable for Magnet, despite the Board and its advisors choosing it as one. It is a legacy data warehouse provider that is declining in revenue. If we were forced to include TDC, we would also include SNOW, an innovative data warehouse provider that has a Rule of 40 that is more like Magnet's. Including both TDC and SNOW cancel each other out, leading to mean / median of 60x FCF. Including TDC only leads to a mean of 54x FCF and median of 46x FCF. Both are still materially above Magnet's 38x.

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