Software AG/Silver Lake: German buyout could yield fat return

Private equity investors prefer targets deserted by public market investors. That description applies to Germany’s Software AG, currently in the sights of US technology investor Silver Lake. Its share price has been wallowing at five-year lows.

Not any more. Shares in the enterprise software developer rose by half at Monday’s open. That matched Silver Lake’s offer valuing Software AG at €2.2bn. Clearly, a tired founder shareholder — the Software AG Foundation — had given up hope. It has tendered 25 per cent of its almost one-third holding in the shares. This boosts Silver Lake’s chances of success.

Software AG offers enterprise tools for businesses. The transition from selling licenses to marketing a subscription service means less cash upfront. That has been painful. Earnings and margins have collapsed over the past five years.

Silver Lake’s €30 per share offer is a sizeable premium over the three-month average of €20. Software AG shares were trading above that level as little as a year ago. Silver Lake had gained influence at the company via a €344mn convertible bond investment. Software AG’s chair Christian Lucas, appointed earlier this year, is also a Silver Lake director. He was excluded from the board’s decision to accept the takeover.

Assuming an extra €1.2bn of debt is injected, Software’s post-deal leverage rises to about 8 times ebitda, far above the current 1.4 times. Then, accept that consensus estimates for 20 per cent revenue growth to 2028 hold true.

If Silver Lake can cut costs and improve profitability to 2019 levels of 28 per cent ready for a 2028 exit, that would beat the current expectations of analysts. If the new owner can sell out at 15 times ebitda multiple — the multiple it is currently offering — the deal would net them a three times return on the equity invested over five years.

Patient minority shareholders, noting the weakness of tech stocks, might expect to be paid more. But most indicators point to a deal going through at this level.