EIG, aka Endurance International Group Holdings, Inc. (NASDAQ:EIGI), aka Bluehost/Constant Contact to most people, announced in SEC filings on November 2, 2020 its agreement to be acquired by affiliates of Clearlake Capital Group L.P. for approximately $3 billion. What makes this very interesting is the premium that Clearlake plans on paying. According to more SEC filings, “The purchase price represents a 79% premium over Endurance’s unaffected share price of $5.30 as of September 25, 2020, the last trading day prior to media speculation about a potential transaction, and a 64% premium to its closing share price on October 30, 2020 of $5.81.” This is a very generous premium if we look at the financial highlights:
- Third quarter year-over-year revenue only had an increase of 3%
- Net income for the same time period is down 14%
- Adjusted EBITDA is down 1%
- Total subscribers were up 3.8% but
- Average revenue per subscriber was down 6%
Back to Clearlake, this is a very generous premium for a company that has remained fairly static during a year where the internet market has seen massive spikes (Zoom) and solid growth for new hosting platforms (Convesio, FLATsite, Strattic, Netlify). Though some people actually think this is very undervalued, from TechRadar, Web hosting giant acquired by private equity firm, sparking legal battle: “Shortly after the announcement, litigation law firm Brodsky & Smith LLC announced it will investigate potential claims against the EIG Board of Directors for “possible breaches of fiduciary duty and other violations of federal and state law in connection with the agreement to be acquired by Clearlake Capital Group”.”
Who is Clearlake?
Let’s get it directly from them:
With a sector-focused approach, the firm seeks to partner with world-class management teams by providing patient, long-term capital to dynamic businesses that can benefit from Clearlake’s operational improvement approach, O.P.S.®
What this tells me is that Clearlake is a rescue capital provider, they are coming in with an approach, seeing a diamond in the rough. They are very well funded for these kinds of investments, from Private Equity International, How Clearlake has deployed $1.3bn since March, “In mid-April Clearlake Capital Group closed its sixth flagship fund on more than $7 billion, well beyond its initial $5 billion target and almost twice the size of its $3.6 billion predecessor.”
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Why Pay a Premium?
I have two thoughts on the matter, the first may be the most obvious based on the numbers, that there are significant inefficiencies in brand management, market, infrastructure, and support. With Clearlake in control and shareholders out of the picture, hard decisions regarding who and what stays and gos can be made. I would certainly expect a reorganization and downsizing of core infrastructure – that doesn’t mean anything is being taken away from customers – but with a number of brands under its belt there may need to be a new sheriff in town to bring some discipline to get back to better income.
Thought two is much more dramatic and less likely but worth mentioning. Clearlake may be looking to outright divest itself of poor performing products and concentrate on new modern hosting. Do all the brands align with such a vision? Could it be done with multiple manages and shareholders? Sure, but a lot easier if there is one boss to rule them all. Will Clearlake keep Constant Contact? Will it keep HostGator? Will it keep Bluehost?
What Happens Next?
Big picture, this is a three (3) to five (5) year hold based on the fund’s goals. With Clearlake’s O.P.S.® I fully expect a lot of cutting and reorganization per thought one above. I’d be surprised if there was a divestiture of any key brands.
Then the big question is who will pay $4 billion in circa 2024? With Automattic valued at approximately $3 billion in 2019, and a strong relationship with EIG, and an IPO destined to happen there could be a stock swap. WP Engine could also be in the mix for the same reasons. They already have an upmarket suite of services and may want to broaden their base.
Of course there is certainly an option to return to the open market or even sale to another private equity group.
For the end user, my gut says that with operational focus there may be less of a focus on top line features and functionality. From the official press release, “We are excited to leverage Clearlake’s O.P.S.® framework to help the Company fuel growth both organically and through acquisitions.” It’s a stretch but certainly not easy to execute both well in a relatively short period of time. I’m going to keep my eye on core operations.
It will be very interesting to watch over the next few years.