Bloomberg News

Renaissance Learning’s Math Means Investors Lose 41%: Real M&A

September 29, 2011

Sept. 30 (Bloomberg) -- Renaissance Learning Inc.’s founders are passing up a 41 percent payout to shareholders for a takeover offer that values the educational software maker at a discount to its current value.

The company, 69 percent owned by the Paul family and its relatives, agreed on Sept. 27 to sell itself to private equity firm Permira Advisers LLP in a takeover that gives minority holders $16.60 a share in cash. A day later, it rejected an all- cash proposal for $18 a share from Plato Learning Inc. in what would be the industry’s second-richest deal in more than a decade, according to data compiled by Bloomberg.

While Renaissance Learning has attracted competing offers after generating more free cash than any education software provider versus their share prices, the board is recommending a lower-priced agreement because the founders said they wouldn’t vote for Plato’s bid. Based on the costs that Plato can wring out from buying Renaissance Learning, GFI Group Inc. says Plato could afford as much as $21.50 a share in an acquisition, or 27 percent more than its price of $16.97 yesterday.

“Minority shareholders are getting less than they could because the Pauls refuse to take the higher offer,” Alfredo Scialabba, a special situations analyst at GFI Group in New York, said in a telephone interview. “Plato is also offering cash and, as far as I know, one dollar is as green as another.”

Jeff Walker, a spokesman for Wisconsin Rapids, Wisconsin- based Renaissance Learning, declined to comment on the Paul family’s decision to opt for the lower bid or whether it would ask Permira to match Plato’s offer.

Acquisition Detail

Renaissance Learning will provide shareholders with more information in the next several days, he said.

Chris Davidson, a spokesman at Permira, declined to comment on whether it would raise its offer. Mary Schneider, a spokeswoman for Bloomington, Minnesota-based Plato, didn’t respond to a telephone message or e-mail requesting comment.

Founded in 1986 by Terrance and Judith Paul, Renaissance Learning sells educational software to more than 70,000 schools. The software helps instruct students from kindergarten through high school and tests their reading and math skills.

Shares of the company, which reached a high of $53.41 in 2001, were little changed this year and closed at $11.83 before Renaissance Learning said on Aug. 16 that Permira agreed to buy the company. Under the original terms, the London-based buyout firm would pay all holders $14.85 in cash for each share owned.

A week later, Renaissance Learning said it had received an unsolicited bid for $15.50 a share from Plato.

Moving the Needle

Permira then boosted its offer to $15 a share for the founding family and its affiliates, while offering minority holders $16.60 each, according to a Sept. 27 statement. Renaissance Learning said the next day that it had also rejected a revised bid from Plato that would pay $15.10 a share to the Paul family and $18 apiece to all other investors.

“Clearly for the people who control the vote, a dime ain’t going to move the needle,” Louis Meyer, a special situations analyst for Oscar Gruss & Son Inc. in New York, said in a telephone interview. “This was driven by the board turning it down not because they didn’t like the price of the deal, but because the Pauls said they weren’t going to vote for it.”

While the founding family is willing to take a discount for the shares they control to sell the company to its preferred bidder, passing up the Plato bid would deprive minority holders of one of the richest deals in the industry.

Plato’s $18-a-share offer values Renaissance Learning at 13.4 times its earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show.

Relative Value

That’s the highest valuation for an educational software deal greater than $100 million since 1995, except for Providence Equity Partners’ buyout of Blackboard Inc. announced July 1. The proposal from Plato represents a 41 percent premium to the stock’s 20-day average prior to Permira’s bid on Aug. 16.

The bidder that is successful in acquiring Renaissance Learning will get a company that has a free cash flow yield of 6.4 percent, higher than any educational software company with a market value of more than $250 million, data compiled by Bloomberg show.

Renaissance Learning is a “cheap asset with a lot of cash flow,” said GFI’s Scialabba. “That’s very appealing to firms that want to establish a platform in this space and other private equity players planning to roll out that strategy.”

Renaissance Learning, which boosted revenue for the last three years, still has room to grow by expanding their product offerings with existing customers and adding more schools to their subscriber base, according to Jerry Herman, a Cleveland- based analyst at Stifel Nicolaus & Co.

Cost Savings

GFI’s Scialabba said Plato can save about $100 million from combining with Renaissance Learning by cutting overlapping costs and eliminating workers. The Permira deal wouldn’t lead to “major layoffs,” the company said in an employee presentation.

With the cost cuts, Plato, owned by private equity firm Thoma Bravo LLC, would be able to raise its bid by $3.50 a share for Renaissance Learning’s minority shareholders and still offer $15.50 each to the founders, he said.

“Shareholders are probably going to put pressure on the company and the board to explain why they didn’t take the higher bid,” said Meyer at Oscar Gruss.

--Editors: Michael Tsang, Daniel Hauck.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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