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Blackboard Seen Losing 50% Gain With Private Equity: Real M&A

Blackboard Inc. shareholders may lose out on a 50 percent gain as private equity buyers circle the maker of online educational software.

Providence Equity Partners is in the lead to acquire Blackboard, a person with knowledge of the situation said this week. Leveraged buyout firms have paid a median of 10.7 times earnings before interest, taxes, depreciation and amortization for software companies in the last three years, as other buyers spent 15.4 times, according to data compiled by Bloomberg. Based on Washington-based Blackboard’s estimated 2012 Ebitda, a private equity takeover may amount to $1.53 billion, or $43.78 a share instead of the $64.40 a non-financial buyer would pay.

While LBO firms may be lured by Blackboard’s lack of long-term debt and the room to boost operating margins that are a third of the industry average, Craig-Hallum Capital Group LLC says they may not pay as much as a buyer in the same business because there aren’t as many overlapping costs to cut. Blackboard, the most expensive educational software company relative to earnings, slid 13 percent to $42.61 through yesterday since reaching a three-year high in April as it hired Barclays Plc to field unsolicited acquisition proposals.

“It would be tough for Blackboard to get over $50 on a private equity deal,” said Mike Malouf, a Boston-based analyst for Craig-Hallum. “A strategic investor could always, and probably most likely would, pay more. The price private equity can offer might not be attractive enough for Blackboard management.”

Private Equity Discussions

The discussions with Blackboard, which has also been considering a bid from private equity firm Hellman & Friedman LLC, could unravel and may not result in an agreement, said the person familiar with the matter, who declined to be identified because the process is private.

Michael Stanton, a spokesman for Blackboard, said the company doesn’t comment on valuation. Lucy Neugart, a spokeswoman at Providence, Rhode Island-based Providence, and Mary Beth Grover, a spokeswoman for San Francisco-based Hellman & Friedman, declined to comment.

Blackboard makes software that lets teachers in kindergarten through 12th grade and university professors post course materials, conduct discussions and distribute assignments online. The company, founded in 1997, has expanded offerings to include a messaging service called Blackboard Connect and Blackboard Transact, a payment product that allows college students to use their identification cards for purchases on and off campus.

Software Takeovers

In software industry takeovers greater than $500 million in the last three years, private equity firms paid a median of 10.7 times Ebitda, data compiled by Bloomberg show. With analysts estimating that Blackboard’s Ebitda will rise to $153.7 million next year, that industry multiple would equate to an equity value for Blackboard of $1.53 billion plus $111 million in net debt. Its market value was $1.49 billion as of yesterday.

Companies that aren’t private equity firms have completed 12 acquisitions of public software targets in that time at a median of 15.4 times Ebitda, the data show. At that level, Blackboard’s equity may be valued at $2.26 billion. A deal for $64.40 a share would mean a 51 percent return for investors who bought at yesterday’s closing stock price.

“Clearly the market is taking it as somewhat of a disappointment because it’s private equity as opposed to a strategic,” said Eric Green, a Philadelphia-based portfolio manager at Penn Capital Management, which oversees $6.5 billion. “The value to another company could have been greater and other companies could have paid more.”

Strategic Buyers

Green said he has sold most of his fund’s Blackboard shares since the company said it was exploring a possible sale.

After Blackboard disclosed the hiring of Barclays as a financial adviser on April 19, the stock rose 31 percent in three days to $48.80. It then fell 13 percent through yesterday.

Blackboard slipped 4.3 percent to $40.76 in New York today.

“With the stock reacting the way it is, its investors believe a strategic buyer is less and less likely,” said Amy Junker, an analyst with Robert W. Baird & Co. in Milwaukee. “The question becomes, what would a private equity buyer be willing to pay?”

A buyout firm may be able to offer between $44 and $48 a share, said Brandon Dobell, an analyst at William Blair & Co. in Chicago. Non-financial acquirers could pay $6 a share more because they could cut up to $20 million in costs and obtain financing at lower rates, he said.

Private Equity Bid

Tom Roderick, an analyst at Stifel Nicolaus & Co. in Chicago, estimated that an industry buyer could offer as much as $65 a share, while a private equity firm may only bid as high as $55, according to an April 28 report.

“They’re not going to take anything in the $40s,” he said in an interview yesterday. “I just don’t see that happening.”

Blackboard has boosted revenue for eight straight years as more universities started using its course management system. In 2012, sales are projected to rise 12 percent to $602 million, based on analysts’ estimates compiled by Bloomberg, the smallest increase in data going back to 2002.

Before Blackboard disclosed the hiring of Barclays, the shares had declined 17 percent in the prior 12 months as the Russell 2000 Technology Index climbed 31 percent.

While short interest is down from a high in October, almost 23 percent of shares available for trading are still being shorted, according to London-based research firm Data Explorers. Short selling is the practice of selling borrowed stock on the bet the price will decline.

Education Spending

“The biggest negative on the stock, and this is reflected in the high short interest, is that they’ve lost some market share over the last few years to open-source competitors,” including Moodle and Sakai, said Scott Berg, an analyst at Feltl & Co. in Minneapolis. Also, state and local education budgets have been under pressure since the U.S. recession, he said.

Blackboard’s 4.7 percent operating margin in the last 12 months is the lowest among educational software makers with market values above $100 million, besides Rosetta Stone Inc., which didn’t post a profit in that period, according to data compiled by Bloomberg. The industry averaged 16 percent, the data show.

Still, Blackboard is the most expensive relative to its earnings in the group. It’s valued at 19.6 times Ebitda in the past 12 months and 170 times net income, the data show.

“What makes them attractive is that they don’t have any debt and they’re dominant in what they do,” Penn Capital’s Green said. “It’s been somewhat of a disappointment over the last couple of years. Other management could potentially turn things around over there.”

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