Another bidder could emerge for Sandvine, says National Bank Financial

The “reasonable” offer on the table for Sandvine (Sandvine Stock Quote, Chart, News: TSX:SVC) might not be the final one, says National Bank Financial analyst Richard Tse.

On Friday, Sandvine announced it had entered into an agreement that will see it be acquired by U.S. private equity firm Vector Capital for $3.80 a share, or about $483-million.

“The Sandvine team has built the clear leader in network policy control, and I am extremely proud of what we have accomplished to date,” said CEO Dave Caputo. “There are a number of long-term growth opportunities that Vector, as a specialist technology investor, is enthusiastic about and can help us pursue more aggressively. We see this as an excellent opportunity to better serve our 300-plus customers, to enhance our strategic position over the longer term and to do it the Sandvine way.”

In a research update to clients today, Tse raised his rating on Sandvine from “Sector Perform” to “Outperform” and raised his one-year price target on the stock from $3.25 to $4.50, implying a return of 45 per cent at the time of publication. The analyst thinks there is an even chance a better bid could emerge.

“The purchase price represents a premium of ~21% over SVC’s Friday closing price and implies a valuation of 1.8x EV/Sales, 9.4x EV/EBITDA and 21.1x P/E on our F2017E, which looks reasonable,” Tse says. “That said, we’re upgrading SVC from Sector Perform to Outperform as we think there’s a balanced potential for a competing bid as part of a 42-day go-shop period that allows Sandvine to actively solicit a superior proposal. In our view, with the floor set at $3.80, we’d take that bet on the potential optionality based on our analysis in this note, reflecting the change in circumstances with an offer for the company now on the table, and how that may draw competing bids. Our target goes to C$4.50 based on a discount value to a potential IRR valuation.”

Tse thinks Sandvine will generate EBITDA of (all figures $USD) $25.7-million on revenue of $131.0-million in fiscal 2017. He expects these numbers will improve to EBITDA of $28.2-million on a topline of $131.9-million the following year.

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