- The stock price of Vonage Holdings Corp. (NASDAQ: VG) increased by over 20% pre-market today. This is why it happened.
The stock price of Vonage Holdings Corp. (NASDAQ: VG) increased by over 20% pre-market today. Investors are responding to Ericsson (NASDAQ: ERIC) entering into an agreement to acquire Vonage (NASDAQ: VG) for $21 per share. This represents a total acquisition price of approximately $6.2 billion (Enterprise Value).
The merger agreement was approved unanimously by the Board of Vonage. This transaction builds upon Ericsson’s stated intent to expand globally in wireless enterprise, offering existing customers an increased share of a market valued at $700 billion by 2030.
For Ericsson, the acquisition builds on the integration of Cradlepoint in September 2020. And Cradlepoint has continued to develop strongly under Ericsson’s ownership.
Vonage and the Vonage Communications Platform (VCP)
Vonage has a strong track record of growth and margin evolution. Sales were $1.4 billion in the 12-month period to September 30 2021. And over the same period, Vonage delivered an adjusted EBITDA margin of 14% and free cash flow of $109 million.
The cloud-based Vonage Communications Platform (VCP) serves more than 120,000 customers and more than 1 million registered developers globally. The API (Application Programming Interface) platform within VCP allows developers to embed high quality communications – including messaging, voice and video – into applications and products without back-end infrastructure or interfaces. Plus Vonage also provides Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) solutions as part of the Vonage Communications Platform.
VCP accounts for about 80% of Vonage’s current revenues and delivered revenue growth in excess of 20% in the 3-year period to 2020 with adjusted EBITDA margins moving from -19% in 2018 to break-even in the 12-month period to September 30, 2021. And Vonage’s management team projects annual growth of over 20% for VCP in the coming years.
Transaction Overview
The acquisition will be conducted by means of a merger agreement through which Ericsson will acquire all of Vonage’s outstanding shares at an all-cash price of $21 per share. The merger consideration represents a premium of 28% to Vonage’s closing share price on November 19, 2021 of $16.37 per share and a premium of 34% to the volume-weighted average share price over the 3 months to November 19, 2021 of $15.71 per share.
The acquisition will be financed through Ericsson’s existing cash resources — which amounted to SEK 88 billion as of September 30, 2021 on a gross basis, and SEK 56 billion on a net basis as of the same date.
The deal is expected to deliver near-term revenue synergy opportunities, including white-labelling and cross-selling of the combined product portfolio estimated to contribute $0.4 billion by 2025. And Ericsson also expects to achieve some cost efficiencies following completion of the transaction.
The deal is expected to be accretive to EPS (excluding non-cash amortization impacts) and free cash flow before M&A from 2024 onwards.
On completion, Vonage will become a wholly owned subsidiary of Ericsson and will continue to operate under its existing name. It will be reported as a separate segment in Ericsson accounts. And Vonage is headquartered in Holmdel, New Jersey in the U.S. with 2,200 employees throughout the United States, EMEA and APAC. Vonage’s employees will remain with the company and the Vonage CEO Rory Read will join the Executive Team of Ericsson, reporting to President and CEO Börje Ekholm.
Ericsson said it remains fully committed to previously communicated financial targets, including long-term EBITA margins of 15-18%; long term FCF before M&A of 9-12% of sales; and a 2022 target EBIT margin of 12-14% for Ericsson Group excluding Vonage.
The completion of the transaction is subject to Vonage shareholder approval, regulatory approvals and other customary conditions and is expected within the first half of 2022.
The Vonage Board of Directors unanimously approved the transaction. And the Board of Directors of Vonage recommends that Vonage shareholders approve the transaction and adopt the merger agreement.
The agreement is a result of a comprehensive review of strategic alternatives to maximize shareholder value. And the Vonage Board of Directors authorized the review of strategic alternatives — which included outreach to a number of potential strategic and financial parties.
Qatalyst Partners is serving as financial advisor and Weil, Gotshal & Manges LLP is serving as legal advisor in connection with the strategic review and transaction.
KEY QUOTES:
“The core of our strategy is to build leading mobile networks through technology leadership. This provides the foundation to build an enterprise business. The acquisition of Vonage is the next step in delivering on that strategic priority. Vonage gives us a platform to help our customers monetize the investments in the network, benefitting developers and businesses. Imagine putting the power and capabilities of 5G, the biggest global innovation platform, at the fingertips of developers. Then back it with Vonage’s advanced capabilities, in a world of 8 billion connected devices. Today we are making that possible.”
“Today Network APIs are an established market for messaging, voice and video, but with a significant potential to capitalize on new 4G and 5G capabilities. Vonage’s strong developer ecosystem will get access to 4G and 5G network APIs, exposed in a simple and globally unified way. This will allow them to develop new innovative global offerings. Communication Service Providers will be able to better monetize their investments in network infrastructure by creating new API driven revenues. Finally, businesses will benefit from the 5G performance, impacting operational performance, and share in new value coming from applications on top of the network.”
— Börje Ekholm, President and CEO of Ericsson
“Ericsson and Vonage have a shared ambition to accelerate our long-term growth strategy. The convergence of the internet, mobility, the cloud and powerful 5G networks are forming the digital transformation and intelligent communications wave, which is driving a secular change in the way businesses operate. The combination of our two companies offers exciting opportunities for customers, partners, developers and team members to capture this next wave.”
“We believe joining Ericsson is in the best interests of our shareholders and is a testament to Vonage’s leadership position in business cloud communications, our innovative product portfolio, and outstanding team.”
— Rory Read, CEO of Vonage
Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis.
