On January 28, 2015 we issued a special situation alert on Saba Software (SABA), a company that provides cloud-based intelligent talent management solution for organizations to hire, develop, engage people worldwide and now is involved in a potential M&A. We initially said we “recently initiated a long position as a bet that the company will be sold at a premium to current share prices.” As promised we are now following up with our full research note.
SABA In Process Of Restating Financials
Basically, SABA has been in the process of restating its financials for all fiscal years since 2010. The pickle management now faces is that if its restatement is not completed by March 9th, 2015 then SABA’s registration of its common stock is subject to being revoked by the SEC. If this were to happen shares would begin trading on the Grey Sheets, an event that could lead to a significant decline in share price. We do not think the Company wants to face this scenario, even if it is only for a short period of time (as it completes the restatement process). Our research finds that the earliest management will be able to finalize the restatement process will be June 2015. Click here to see the full research note. Thus, we feel they will make a strong commitment to selling the company on or before the March 9th, 2015 restatement deadline.
The fact that SABA may be up for sale is no secret. On January 20th 2015 the company made the following comment in a press release (stock was trading at $6.75):
“The Company intends to continue to work with its financial advisor, Morgan Stanley & Co. LLC, and its legal advisors to consider and evaluate the acquisition proposals and other potential opportunities in comparison to the Company’s plan to continue operation as a standalone business. The indications of interest being considered by the Company provide for a purchase price per share in excess of the current quoted price for the Company’s common stock.”
“Although the Company has not established a definitive timeline to complete its strategic review process and no decision has been reached at this time regarding a specific counterparty, the Company anticipates being in a position to enter into a definitive agreement prior to February 15, 2015 if the Board of Directors determines to pursue a sale transaction.”
Basically, SABA has been in the process of restating its financials for all fiscal years since 2010. The pickle management now faces is that if its restatement is not completed by March 9th, 2015 then SABA’s registration of its common stock is subject to being revoked by the SEC. If this were to happen shares would begin trading on the Grey Sheets, an event that could lead to a significant decline in share price.
We do not think the Company wants to face this scenario, even if it is only for a short period of time (as it completes the restatement process). Our research finds that the earliest management will be able to finalize the restatement process will be June 2015. Thus, we feel they will make a strong commitment to selling the company on or before the March 9th, 2015 restatement deadline.
Purchasing Shares Of SABA
We are currently working through various valuation scenarios, but we have learned that at least one analyst the covers the company had a take out price target of $13.00 to $17.00 as of December 2014 . At the high end we estimate that shares would be trading at a Price to Sales multiple of 3.6, which is near the midpoint Price to Sales assumption of 4.0 that we typically assign to similar companies. Shares are currently trading at a Price to Sales of 1.9. Due to the time crunch issue facing the company we think shares will not be able to fetch a maximum assumption take out multiple.
Here is the valuation analysis from an analyst report from Craig-Hallum Capital Group:
Assuming $140M in revenues (which we believe is a conservative estimate of where the business could be) and 30M shares outstanding, we estimate an acquisition range of $13-$17, or 3.3x-4.1x EV/Revs (assuming $21.6M/$91M in cash/debt). We are lowering our price target from $18 to $17, which is just over 4x EV/Revs (assuming $140M) and within our estimated acquisition range. The comp group trades over 7x, but given the restatement process, SABA’s stock likely warrants a discount.
We purchased and continue to purchase shares in SABA as a bet that the company will be sold at a premium to current share prices, possibly as soon as February 15th 2015.