Clarivate announces the acquisition of ProQuest, a software, data, and analytics provider to academic and research institutions.
The total consideration stands at $5.3 billion and carries a 12-13x EV/EBITDA multiple (including synergies).
The deal adds clear strategic benefits and an accretive financial outcome appears likely.
With shares trading below peers, I am bullish on the earnings growth outlook.
Clarivate (NYSE:CLVT), a leading solutions provider to the IP/scientific research community, recently announced a definitive agreement to acquire ProQuest, a software, data, and analytics provider to academic and research institutions, for a total consideration of $5.3 billion. The transaction brings clear strategic benefits - post-acquisition, Clarivate will have the most extensive collection of curated research content globally and will have opportunities to broaden its predictive and prescriptive analytics offerings while also tapping into library enterprise software sales. Financially, the deal also accelerates the path toward its $2.8-3.0 billion revenue target (relative to fiscal 2020 pro-forma revenue of $2.6 billion). With shares trading below peers as well, I am bullish on the outlook.
A Closer Look at the ProQuest Acquisition
Clarivate recently disclosed a definitive agreement to acquire ProQuest, a provider of software, data, and analytics to academic and research institutions, for $5.3 billion (comprising $4.0 billion in cash and $1.3 billion of equity). Notably, the announced consideration also incorporates the refinancing of ProQuest's $1 billion of debt. Meanwhile, the $4 billion cash portion will be funded through $2 billion of debt (c. $1 billion of ProQuest debt refinanced and c. $1 billion from a new issuance) and a c. $2 billion primary equity issuance. In connection with the proposed deal, CLVT has also secured a financing backstop in the form of a $4.0 billion fully-committed bridge facility. Post-deal, ProQuest shareholders will receive 47 million Clarivate shares, implying a c. 7% pro-forma ownership of the combined company.(Figure 1).
Based on fiscal 2020 numbers, ProQuest should add considerably to the pro-forma numbers - the company generated $876 million in revenue and $250 million in EBITDA. Assuming management's guidance of 5+% top-line growth for ProQuest in fiscal 2021 holds, this implies revenue contribution of c. $920mn and c. $350 million in EBITDA (post cost synergies of c. $100 million). In turn, this implies a transaction multiple of 12-13x EV/EBITDA, including synergies, which seems very reasonable. Longer-term, the transaction is also set to unlock c. $65 million in annual cash tax savings, which should improve the valuation multiple as well. The transaction is guided to close in FQ3 '21, at which time Clarivate will likely readjust the forward guidance.
Acquisition Adds Clear Strategic Benefits
At first glance, the acquisition looks to be highly strategic - it adds complementary assets in the academic and government space, which Clarivate has previously sized at c. $33 billion. As a result, post-transaction, Clarivate will hold a pro-forma market share of c. 5% in the Academia and Government Information Services space. With ProQuest's pre-pandemic organic growth already running in the mid-single digits % range, I expect a further acceleration under the Clarivate umbrella as management unlocks revenue synergies, improves customer retention, and adds new products and solutions.
The addition of ProQuest assets should also broaden its analytical offerings beyond traditional journal publication data and citations into the predictive and prescriptive analytics space from the combination of ProQuest's data cloud with Clarivate's Research Intelligence Cloud. As things stand, the software solutions business is also the fastest-growing ProQuest segment, and assuming management is able to maintain the solid retention rates as the solution is integrated into customer workflows, the deal should add significantly to the earnings growth outlook. All in all, the acquisition should allow the company to better serve the full length of the research value chain, likely improving its value proposition and pricing power considerably over time.
Financial Impact Screens Favorably
Management commentary also points toward an accretive outcome - the ProQuest acquisition is set to help accelerate revenue growth and reduce costs, driving improved free cash flow generation. Considering the range of opportunities available for revenue synergies associated with cross-selling and upselling of combined company solutions, I think there is potential for an upside surprise, especially with recurring revenue contributing 90+% of total revenue. Furthermore, the company also sees c. $100 million of annual run-rate cost synergies post-close and an additional c. $65 million in annual cash tax savings from the transaction structure, which improves the case for an accretive outcome as well.
Based on fiscal 2020 numbers alone, the pro-forma entity would have generated $2.6 billion in revenue and adj EBITDA of $1.2 billion (including cost synergies). And considering ProQuest's standalone FCF conversion stands at c. 80%, the acquisition also likely accelerates debt reduction and increases the capacity for additional M&A going forward. Notably, management is targeting pro-forma net leverage of 4.5x at close and 3.5x by end-2022, which is encouraging. Management also expects the deal to be double-digit % accretive to earnings in fiscal 2022 and mid-teens % accretive to earnings in fiscal 2023, although I would note, however, that Clarivate does not incorporate any revenue synergies into its base case. With cost synergies at c. 11% of target revenue also well below typical deals in the info services space, which tend to run at sub-20%, I see a clear upside bias to the estimates.
Overall, I view the addition of ProQuest as a net positive, with Jerre Stead looking to successfully replicate his playbook from IHS. The strategic rationale for the acquisition is clear - Clarivate has plenty of room to develop enriched content and unlock distribution synergies, which should ultimately drive an accretive financial outcome. And preliminary estimates on reasonably conservative assumptions shows that a mid-teen % accretion scenario is achievable in fiscal 2023, which is a positive. As such, I continue to view the current valuation as attractive, especially in light of the potential for margin expansion and organic growth acceleration here, with the pro-forma c. 21x fiscal 2022 EV/EBITDA multiple (relative to the current c. 24x EV/EBITDA), also below peers like IHS Markit (INFO), MSCI (MSCI), and Thomson Reuters (TRI).
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