How Jana Companions might shake up telecom supplier Vonage in a bid to spice up worth
Firm: Vonage Holdings Corp. (VG)
Inventory Market Worth: $3.6B ($14.48 per share)
Activist: Jana Companions
Common Value: n/a
Activist Commentary: Jana Companions is a really skilled activist investor with a lot success within the Info Expertise business. Jana’s common 13D returns on this business common 36% versus 10.72% for the S&P 500 over the identical interval.
What’s Taking place?
On Aug. 31, 2021, it was reported that Jana Companions is pushing Vonage Holdings Corp. (VG) to discover strategic options, together with a sale of all or a part of the corporate.
Behind the Scenes:
Jana initially disclosed its place in Vonage in its 13F final quarter and disclosed in its most up-to-date 13F that its place elevated from 2.31% to three.91%. The chance right here is to create worth by optimizing the asset combine and refining the portfolio or promoting the corporate.
The legacy Vonage enterprise is a low a number of, slowly declining enterprise that constitutes the smallest a part of the worth of the agency (with $284 million of income), but it surely’s what the corporate is understood for. This considerably and adversely impacts the corporate’s general valuation by dragging down the valuation of its most tasty belongings. The API enterprise has roughly $550 million of income and is considerably undervalued by the market as a part of this firm. The closest pure play enterprise to that is Twilio Inc. (TWLO), which trades at 19x income. Making use of only a 7x a number of to Vonage’s API enterprise would give that enterprise alone a valuation of $3.85 billion, which is the same as the enterprise worth of the whole firm. If that a number of acquired wherever near TWLO’s 19x a number of, the current valuation of Vonage begins to look actual foolish. Furthermore, the CaaS enterprise has actual worth as effectively with roughly $500 million of income. Its friends RingCentral and 8×8 commerce at 12x income and 4x income, respectively. Granted that Vonage’s CaaS enterprise would most likely commerce nearer to the 4x a number of, however that offers it one other $2 billion of worth on an organization that presently has a complete enterprise worth of $3.85 billion. Whereas the legacy Vonage enterprise is the least priceless of the three, administration has projected that it’ll generate $600 million of money stream over the subsequent 5 years, and just lately introduced the termination of a gross sales course of for that unit, which announcement despatched the corporate’s inventory worth down by 12%. Lastly, the corporate additionally has roughly $760 million in internet working losses it could actually use to protect revenue over the long run.
Realizing the true worth of those belongings is just not an operational problem, however a strategic one. Operations and administration aren’t issues right here — the corporate just lately turned over its administration group and has had six quarters of fine earnings in a row. The low cost right here is due to market notion and portfolio construction. Accordingly, the best way to maximise worth right here is for the corporate to interact an funding financial institution to conduct a radical strategic evaluation to unlock shareholder worth.
There are definitely many good the reason why these companies ought to be separated in some method. A sale of the legacy Vonage enterprise wouldn’t solely generate money for the corporate, however would probably result in a re-rating of the a number of for the remainder of the enterprise that will create shareholder worth in addition to make the remaining firm a extremely enticing acquisition goal. Furthermore, a standalone API enterprise wouldn’t solely have a a lot increased a number of, however it could decrease the corporate’s price of capital nearer to its friends to allow it to higher compete for M&A alternatives. Alternatively, a strategic evaluation might result in a sale of the whole firm at a premium to non-public fairness, who might do the strategic work themselves to create further worth.
This isn’t the primary latest activist marketing campaign at Vonage. Legion Companions can be concerned right here they usually settled for a board seat. Legion stated in an investor letter dated Oct. 12, 2018 that they consider the corporate’s shares ought to be value $39 by the top of 2020 versus $14.16 at Sept. 30, 2018. Nevertheless, the inventory has not moved a lot above this stage. Having Jana concerned now might definitely be useful because the agency could be rather more aggressive than Legion. That is as a result of not like Legion, Jana is just not at the moment certain to standstill restrictions. We anticipate Jana to proceed to advocate for a strategic evaluation and consider the corporate shall be receptive to those overtures. If not, beginning on Feb. 3, 2022, Jana could make director nominations to extend the stress they exert on the corporate.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.