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Enghouse Puts Up $42.1M for Video Tech Specialist Espial

Jeff Baumgartner
3/26/2019
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Adding another breaker to the waves of recent M&A moves that have crashed into the video and pay-TV software and infrastructure market, Enghouse has agreed to splash out Can$56.5 million (US$42.16 million) for Espial Group.

Enghouse and Espial, both headquartered in Canada, didn't explain the strategic benefit of the proposed deal in much detail, and Enghouse has yet to respond to questions about the acquisition, announced Monday (March 25). However, some additional light on the deal could be shed this afternoon, when Enghouse chairman and CEO Stephen Sadler speaks at the Scotiabank Global Banking and Markets event in Toronto.

The acquisition will push Enghouse, a software and service company focused on areas including number portability, network platforms and cloud-based service delivery, into a tough pay-TV and multiscreen video marketplace. (See Smaller Cablecos Fleeing Legacy Pay-TV and Pay-TV Model Must Be 'Blown Up'.)

Espial, which enhanced its positioning in the video tech market in 2016 via the acquisition of Arris's Whole Home Solution, has more than 50 customers worldwide, comprising large, midsized and small cable MSO and service provider customers. Examples include Tele Columbus, Orange, Altice, Shaw Communications, TDS, Com Hem, Vodafone, Buckeye Broadband, WideOpenWest, Conway Corp., Inter Mountain Cable, Hiawatha Broadband Communications, Videotron, and Consolidated Communications. (See Arris Ends Dream of Set-Top Software Riches and Espial Boots Up Managed Android TV Offering.)

Espial's software supports both operator-supplied boxes and various retail streaming devices, and has enabled its platform to integrate OTT services such as YouTube and Netflix. Espial says its customers have deployed more than 50 million devices collectively.

From a revenue standpoint, Espial's business is not massive… and it has been shrinking. In Q4 2018, the company posted revenues of C$6.7 million ($5 million), down from C$10.15 million ($7.84 million) a year earlier, though annual recurring software-as-a-service-related revenue jumped 81%, to C$7.5 million ($5.6 million). Espial ended 2018 with cash and cash equivalents of C$33.40 million ($24.94 million), and this financial overview (PDF) from November 2018 showed that Espial had no debt.

Under the deal, Espial shareholders will get C$1.57 ($1.17) for each Espial share held. Enghouse said the deal represents a 39% premium to the closing price of Espial shares on the Toronto exchange on March 22, 2019, and a 35% premium to the average price of those shares over the past 30 trading days. Espial shares surged 37.17%, to C$1.55 ($1.16) Monday on news of the deal. (See Enghouse to Acquire Espial for C$56.5M.)

The companies said Espial's board has unanimously approved the deal and have recommended that shareholders greenlight the offer. Board approval followed the direction of an independent committee of Espial board directors comprising Neil McDonnell, Aamir Hussain, Michael Lee and Peter Seeligsohn that considered the proposal and obtained a "Fairness Opinion" on it from Paradigm Capital.

A special meeting of Espial shareholders to consider the proposal will be held in May. Espial and Enghouse expect the deal to close in the second half of 2019.

If the deal goes through, it will represent the latest in a string of recent M&A activity involving video software and hardware players focused on the pay-TV sector.

Among examples, TiVo, another player focused on the market, is conducting a strategic review that could lead to it splitting into two pieces -- intellectual property/licensing and products. Synamedia was spawned via the acquisition of Cisco Systems's video software business. Ericsson-backed MediaKind is now majority owned by One Equity Partners. It's also been speculated that CommScope will attempt to sell Arris's set-top business following its merger. (See MediaKind Tries to Do More With Mediaroom, CommScope Still Hazy on Arris's CPE Biz, TiVo Preparing to Separate Its Products & Licensing Businesses and Bye Bye Cisco Video Software, Hello Synamedia.)

— Jeff Baumgartner, Senior Editor, Light Reading

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Alan Breznick
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Alan Breznick,
User Rank: Author
3/27/2019 | 12:58:26 PM
Re: Steve Perlman & Rearden Steel to...Enghouse?
You are not alone there, Jeff. There was plenty of dandruff flying at the investor conference yesterday. I think Enghouse has some serious 'splaining to do.

 
Jeff Baumgartner
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Jeff Baumgartner,
User Rank: Light Sabre
3/27/2019 | 12:46:31 PM
Re: Steve Perlman & Rearden Steel to...Enghouse?
Thanks, Alan. Does seem that they love them some M&A... just noticing that they have a page on their website dedicated to acquisitions.  And for each division at the company, they like to highlight key acquisitions within those categories. But this deal for Espial is still a head-scratcher to me. JB 
Alan Breznick
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Alan Breznick,
User Rank: Author
3/27/2019 | 10:39:41 AM
Re: Steve Perlman & Rearden Steel to...Enghouse?
Well, as it turns out, the preso by Enghouse Chairman & CEO Stephen Sadler at the Scoriabank investment conference in Toronto yesterday was pretty much a bust. Although we are not allowed to report on what he actually said because the talk was off-the-record, suffice it to say that Sadler offered very little insight on why Enghouse bought Espial and what it plans to do with the company. He also didn't seem like he knew that much about Espial's core video business but perhaps he was just being cagey. For Enghouse, Espial appears to be just amother way for the company to reach more service providers, especially in North America. Bt we'll see how long Espial lasts in the Enghouse fold because Sadler clearly loves to wheel and deal, based on his comments yesterday about the company's general M&A strategy.     
Jeff Baumgartner
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Jeff Baumgartner,
User Rank: Light Sabre
3/26/2019 | 2:59:23 PM
Steve Perlman & Rearden Steel to...Enghouse?
Still nothing back from Enghouse on their strategic plans on this one. Seems to me they are buying into a business they don't know or at least haven't been laser-focused focused on from what I can glean...and I can imagine that Espial's cash coffers and no debt financial position had no small part in this deal happening.

I'm very interested to learn what the Enghouse CEO says at the investor's conference in Toronto today, but the entire sector Espial is in today is struggling. How does Enghouse expect to retain let alone grow this business?

 But it's weird to think that technologies that started with Steve Perlman and his once secretive startup known as Rearden Steel in 1999, later Moxi Digital and Digeo, acquired by Arris in 2009, then onto Espial, would end up with...Enghouse. JB
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