The Pros And Cons Of Siris Capital's Proposed Synchronoss Deal

Siris Capital announced on Oct. 5 that it has entered into a period of exclusivity with mobile cloud solutions provider Synchronoss Technologies, Inc. SNCR, with the exclusivity period expiring on Oct. 11.

The Break-Up And The Patch Up

Siris Capital indicated in the 13-D filing on Oct. 5 that it planned to negotiate with Synchronoss, regarding its intention to buy Intralinks for up to $915 million in cash.

It was revealed in late June that Siris Capital had earlier in January offered to buyout Synchronoss for $18 per share. However, in September, Siris said it is no longer interested in buying Synchronoss, although the latter suggested that it remains in active discussions with Siris and other interested parties regarding a potential deal.

Siris Capital is the largest shareholder in Synchronoss, beneficially owning 6 million of Synchronoss shares or about 13 percent of the outstanding shares.

Deutsche Bank in a note released on Monday outlined the key parameters gleaned from the Oct. 5 13-filing, and also offered its take on Siris Capital's proposal.

As such, Deutsche Bank reaffirmed its Hold rating on Synchronoss and its $18 price target for the shares, citing the uncertainty over the next several weeks and a lack of disclosed financial to investors. The firm left its estimates unchanged.

At the time of writing, Synchronoss shares were rallying 2.70 percent to $14.08.

Analyst Nandan Amladi noted that the 13-D filing revealed that Siris will acquire Intralinks for $915 million in cash, and return the about the 6 million shares it owns to Synchronoss. Additionally, Siris will take a preferred equity stake of about 20 percent in Synchronoss for $185 million.

Amladi took a look at how the financial model evolved, assuming both companies agree to the terms and execute the transaction.

Deal Helps Focus On Core Business

The analyst expects the Intralinks deals to set back Synchronoss' enterprise ambitions, while also slowing momentum in the two JVs that were intended to help differentiate Intralinks' collaboration platform.

However, the analyst thinks the cash inflow of $1,100 million Synchronoss is likely to receive will notably lower debt profile, mitigating concerns about liquidity and debt covenant. The analyst said the firm can now begin to focus on its telco-facing roots.

Deutsche Bank expressed surprise at the 20 percent Siri stake, which values the cloud business at $925 million, as concerns abound over contract renewal by Verizon Communications Inc. VZ next year. The firm raised questions as to whether Synchronoss is making a profit in the sale of Intralinks, which it acquired for $821 million in December.

"A clean exit from this transaction would likely be a welcome development for employees and investors alike," the firm said.

The firm noted that the company's stock has come under pressure recently due to management changes and delayed filings.

Concerns Exist

Meanwhile, the firm said the issue of customer concentration would persists, as the post-Intralinks Synchronoss would be heavily reliant on Verizon and Softbank Corp. (Japan) SFTBY instead of Verizon and AT&T Inc. T.

The firm is also concerned about the looming Nov. 6 deadline for completing delayed filings. The firm added that it isn't able to judge concerning the possibility of the deal being completed within the next several weeks at this stage.

"However, if management is able to run the Cloud business at a ~25% EBITDA margin (several points lower than in recent history), our analysis suggests SNCR shares could be worth over $20," the firm said.

At time of publication, shares of Synchronoss were up 4.49 percent at $14.32.