Constellation Software keeps Outperform rating with Natoinal Bank

National Bank Financial Markets analyst Richard Tse likes the new acquisition and spin-out proposed by Canadian software company Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU), saying in a Tuesday report to clients that it looks like a repeat of last year’s successful move by CSU on Topicus.

Constellation Software announced on Monday that its Lumine operating group has entered into a binding agreement to acquire WideOrbit Inc, a US-based vertical market software provider for US$490 million. The move would see WideOrbit become a wholly-owned subsidiary within Lumine Group, while concurrent with the acquisition, Constellation proposed a transaction to spin out Lumine into a separate, publicly-traded company.

“Today’s news marks the next step in Lumine Group’s journey towards building the world’s leading network of communications & media software companies,” said David Nyland, Lumine CEO, in a press release. “WideOrbit will accelerate Lumine Group’s expansion into the media space, bringing a wealth of domain knowledge, an experienced leadership team, and a customer ecosystem we look forward to continue serving.”

On the proposed transaction, Constellation President Mark Leonard said, “WideOrbit will continue to operate as an autonomous company within Lumine Group, building on their history as a market leader and partner to leading broadcast and media companies.”

The deal will see Constellation issue a cash payment of US$181 million plus 13.83 per cent of the shares of Lumine Group to eligible WideOrbit shareholders, with an expected closing date of the acquisition during the first quarter of 2023.

Looking at the deal, Tse noted WideOrbit’s 2021 annual gross revenues of US$167 million, while Lumine’s 2021 annual gross revenues were at US$228 million. Tse estimated that the purchase price for WideOrbit implies a 2.9x EV/Sales multiple and a 10.9x EV/EBITDA multiple on 2021 numbers, which he deemed as “reasonable and consistent” with CSU’s portfolio of similar-sized assets.

“If you’ve been following our research, you’ll know our view that the success of Topicus would likely propel Constellation to pursue other spin offs as a way of driving incremental value given our view that an independent public entity would provide the basis to drive outsized performance,” Tse wrote.

“All in, we continue to like CSU for its defensive attributes (recurring revenue and cash flow) and accelerated growth profile given the accelerated pace of capital deployment,” he said.

With the update, Tse reiterated an “Outperform” rating on Constellation Software and $2,350 per share target price, which at the time of publication represented a projected one-year return of 8.8 per cent.