Focus: How two private equity firms negotiated New Relic deal down to $6.5 bln

New Relic

03/08/2023 15:46

(Adds TPG declining to comment)
    By Anirban Sen and Milana Vinn
       NEW YORK, Aug 3 (Reuters) - Buyout firms Francisco
Partners and TPG  TPG.O  saved hundreds of millions of dollars
in their $6.5 billion deal to buy New Relic  NEWR.N  by walking
away from negotiations with the business software company in May
and then returning two months later with a lower offer, people
familiar with the matter said.
    The two private equity firms offered more than $90 per share
in cash to acquire New Relic in May, a bid that the company
rejected as inadequate, the sources said. 
    Francisco Partners and TPG walked away from the discussions
as a result. When they returned in the middle of July with a
lower offer, New Relic's business prospects had deteriorated, as
it signed up customers at a slower pace amid corporate curbs in
technology spending, according to the sources. 
    New Relic then lowered its price expectations and on Monday
agreed to a deal price of $87 per share. The climbdown, which
has not been previously reported, was key to the company and the
private equity firms bridging their price disagreements. 
    To aid the deal's financing, New Relic's founder and
Executive Chairman Lew Cirne, who owns 10.3% of the company,
agreed to roll 40% of his stake into the deal rather than cash
out. 
    This trimmed how much money Francisco Partners and TPG
needed to invest in the deal, an attractive proposition given
that the equity check accounted for $4.1 billion, almost
two-thirds of the deal's value and higher than traditional
leveraged buyouts. A debt package they secured from other
private equity firms to fund the remainder comprised of a $2.4
billion loan and a $250 million revolving facility, according to
one of the sources. 
    The sources requested anonymity ahead of the company
publishing an official account of its negotiations with the
private equity firms in the coming weeks. New Relic and TPG
declined to comment, while Francisco Partners did not respond to
a request for comment.
    The deal price represents a 30% premium over the
volume-weighted average of New Relic's stock over the last 12
months. The valuation, equivalent to about 6 times New Relic's
projected 12-month revenue, is in line with some peers in this
space but lower than others, according to RBC Capital, Credit
Suisse and Baird analysts.
    To make sure it is not missing out on a better deal with
another potential acquirer, New Relic negotiated a 45-day
'go-shop' period, during which it will be allowed to engage in
deal discussions with other parties. If it finds a better deal,
it will have to pay Francisco Partners and TPG a $98 million
break-up fee to terminate their contract.
    The share reaction since New Relic announced its deal on
Monday indicates that most investors do not see a better
outcome. The stock ended trading on Wednesday at $83.90, well
below the $87-per-share deal price. Some traders said the
slightly-higher-than-typical spread reflected a small degree of
antitrust risk facing the deal, given that Francisco Partners
owns Sumo Logic, a peer of New Relic.
    U.S. regulators under President Joe Biden have been stepping
up their scrutiny of corporate acquisitions by private equity
firms, concerned that owning too many companies in the same
space could harm competition. The U.S. Department of Justice is
considering whether to challenge Thoma Bravo's $2.3 billion
acquisition of business software company ForgeRock Inc  FORG.O ,
for example, because of potential overlap with some other
holdings of the technology-focused buyout firm. 
    
    PIVOT STUMBLING
    The New Relic deal faces limited risk when it comes to the
company's shareholders backing it in a shareholder vote.
Francisco Partners and TPG got binding agreements from Cirne and
New Relic shareholders Jana Partners and HMI Capital,
representing 20% of the shareholder votes to be cast, to back
the deal.
    New Relic, an anagram of Cirne's full name, develops
cloud-based software to help websites and application owners
track the performance of their services. The San Francisco-based
company counts large companies, including Anheuser-Busch InBev
 ABI.BR  and Adobe Inc  ADBE.O , among its customers. 
    In 2020, New Relic pivoted to a pay-as-you-go pricing model
from a subscription model that software companies typically use.
While it initially enjoyed success, it has more recently faced a
slowdown. Its pay-as-you-go customers grew 35% last year, but
the company projected they would grow 20% this year. Meanwhile,
its subscription customers keep declining. 
    For its latest financial year, New Relic reported annual
revenue growth of about 18% compared with peer Dynatrace's
 DT.N  growth of 25%. 

 (Reporting by Anirban Sen and Milana Vinn in New York; Editing
by Greg Roumeliotis and Diane Craft)
 ((Anirban.Sen@thomsonreuters.com; Twitter: @asenjourno; Reuters
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