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How Jana Partners could shake up telecom provider Vonage in a bid to boost value

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How Jana Partners could shake up telecom provider Vonage in a bid to boost value

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Company: Vonage Holdings Corp. (VG)

Business: Vonage is a sequence of three main businesses: (i) the legacy client VOIP business; (ii) Application Programing Interface (API) business, which helps companies communicate to their customers by means of text messaging and (iii) Cloud-based Enterprise Communication as a Provider business (CaaS).

Early Newspaper

Stock Market Value: $3.6B ($14.48 per share)

Activist: Jana Partners

Percentage Ownership:  3.91%

Average Value: n/a

Activist Commentary: Jana Partners is a very skilled activist investor with worthy success in the Information Abilities industry. Jana’s average 13D returns in this industry average 36% versus 10.72% for the S&P 500 over the same length.

What’s Happening?

On Aug. 31, 2021, it was reported that Jana Partners is pushing Vonage Holdings Corp. (VG) to explore strategic alternatives, including a sale of all or part of the company. 

Behind the Scenes:

Jana initially disclosed its place in Vonage in its 13F last quarter and disclosed in its most latest 13F that its place increased from 2.31% to 3.91%. The opportunity right here is to create value by optimizing the asset mix and refining the portfolio or selling the company.

The legacy Vonage business is a low a number of, slowly declining business that constitutes the smallest part of the value of the firm (with $284 million of income), nevertheless or not it is what the company is known for. This significantly and adversely affects the company’s overall valuation by dragging down the valuation of its most attractive assets. The API business has approximately $550 million of income and is substantially undervalued by the market as part of this company. The closest pure play business to right here’s Twilio Inc. (TWLO), which trades at 19x income. Applying apt a 7x a number of to Vonage’s API business would give that business alone a valuation of $3.85 billion, which is equal to the enterprise value of your total company. If that a number of obtained anywhere shut to TWLO’s 19x a number of, the indicate valuation of Vonage begins to understanding real silly. Furthermore, the CaaS business has real value as well with approximately $500 million of income. Its peers RingCentral and 8×8 trade at 12x income and 4x income, respectively. Granted that Vonage’s CaaS business would probably trade closer to the 4x a number of, nevertheless that presents it another $2 billion of value on a company that presently has a total enterprise value of $3.85 billion. While the legacy Vonage business is the least valuable of the three, management has projected that this may generate $600 million of cash paddle together with the stream over the subsequent five years, and these days announced the termination of a sales task for that unit, which announcement despatched the company’s stock mark down by 12%. Finally, the company also has approximately $760 million in acquire operating losses it can exhaust to defend income over the future.

Realizing the legal value of these assets will not be an operational challenge, nevertheless a strategic one. Operations and management are not complications right here — the company these days became over its management team and has had six quarters of accurate earnings in a row. The bargain right here is because of market opinion and portfolio construction. Accordingly, the way to maximize value right here is for the company to engage an investment bank to habits a thorough strategic overview to free up shareholder value.

There are certainly many accurate reasons why these businesses wishes to be separated in some manner. A sale of the legacy Vonage business would not only generate cash for the company, nevertheless would seemingly lead to a re-rating of the a number of for the relaxation of the business that would create shareholder value as well as make the remaining company a extremely attractive acquisition target. Furthermore, a standalone API business would not only have a worthy greater a number of, nevertheless it may well decrease the company’s mark of capital closer to its peers to enable it to larger compete for M&A opportunities. Alternatively, a strategic overview could lead to a sale of your total company at a top class to private equity, who could accomplish the strategic work themselves to create additional value.

Right here’s not the first latest activist campaign at Vonage. Legion Partners is also involved right here and they settled for a board seat. Legion said in an investor letter dated Oct. 12, 2018 that they contemplate the company’s shares wishes to be worth $39 by the stop of 2020 versus $14.16 at Sept. 30, 2018. Then again, the stock has not moved worthy above this stage. Having Jana involved now could certainly be purposeful as the firm can be rather more aggressive than Legion. That’s because unlike Legion, Jana will not be currently drag to standstill restrictions. We inquire Jana to continue to advocate for a strategic overview and contemplate the company will seemingly be receptive to these overtures. If not, starting on Feb. 3, 2022, Jana can make director nominations to increase the strain they exert on the company.

Ken Squire is the founder and president of 13D Monitor, an institutional research carrier on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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How Jana Partners could shake up telecom provider Vonage in a bid to boost value