A southern Ontario enterprise software firm has agreed to acquire Ottawa’s Espial Group in an all-cash deal valued at $56.5 million, the two companies announced Monday.
Shares in Espial (TSX:ESP) surged more than 35 per cent to $1.54 in late afternoon trading on the Toronto Stock Exchange after Markham-based Enghouse Systems said it plans to buy the local firm that develops television and video platforms for cable operators and streaming services.
Under the agreement, Enghouse Systems (TSX:ENGH) will pay $1.57 per share for Espial, a 39 per cent premium on the Ottawa company’s closing price on the TSX last Friday. The transaction still requires the approval of regulators and shareholders of both firms and is expected to close in the second quarter of this year.
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Senior executives at Enghouse did not respond to requests for comment on Monday. Espial director of marketing Dipalli Bhatt told OBJ the pending acquisition was “very encouraging and exciting news,” adding more details would be available in the near future.
The deal comes as Espial has been shifting its business model away from the traditional software licensing approach – in which customers pay a one-time fee to use a product – toward a subscription-based software-as-a-service method of generating revenues.
The transition hasn’t been without its hiccups.
Espial’s software licensing revenues plummeted from $18.1 million in fiscal 2016 to about $9.4 million last year as the company moves more customers to the new model.
Meanwhile, its software subscription revenues jumped dramatically from just over $1 million in 2017 – when Espial introduced its SaaS-based Elevate platform – to $6.3 million in the last fiscal year. The firm now has 30 operators using its SaaS platform with apps on Google, Amazon, Apple and Roku stores.
Still, analysts say it’s been a tough transition period for Espial, which posted a net loss of $4.5 million in fiscal 2018 and has lost a combined $18 million since 2016. In the past year or so, the company has shuttered offices in Montreal, Paris and Cambridge, England, and trimmed its workforce in an effort to rein in expenses.
After trading as high as $2.04 in February 2018, Espial’s shares were worth just $1.13 on Friday before making big gains in the wake of Monday’s announcement.
‘Fair’ deal, if a little low: analysts
In a briefing note, GMP Securities analysts Justin Keywood and Steven Bain called Enghouse’s offer “fair” but said it was well below their recent target price of $2.50 a share.
“In this regard, the deal price could be seen as low, but (Espial) operates in a tough industry and is still in the process of a transition period to a SaaS focus,” the note said. “The deal valuation seems fair in the near term compared to the risks and patience that may be required for (Espial) shareholders over the next year.”
In an interview with OBJ on Monday afternoon, Keywood said Espial could benefit from the sales and marketing muscle of its much larger new partner, which generated revenues of more than $340 million in fiscal 2018 and has a market capitalization in excess of $1.7 billion.
On its website, Enghouse Systems says acquisitions form a “large part” of its overall growth strategy. If approved, the company’s bid for Espial would be the firm’s fourth acquisition since last November and its seventh since the start of the 2018 fiscal year.
Although Keywood and Bain noted the “potential for higher competing offers to emerge” for Espial, Keywood told OBJ he doesn’t expect any alternative suitors to come out of the woodwork.
“It’s a very niche area,” he said of Espial’s market segment, adding it would require “a certain level of expertise” for a firm to integrate the Ottawa company into its operations.
Shares in Enghouse Systems were up eight cents to $31.62 in late afternoon trading on the TSX.
