Advent attempts to break $1.9bn Forescout deal

Advent International may scrap its $1.9 billion deal for Forescout Technologies, the publicly-traded cybersecurity company the firm agreed to take private three months ago.

Advent provided notice to Forescout on Monday that it would not be proceeding to consummate the acquisition on May 18, 2020, as scheduled.

Forescout and Advent have received all necessary approvals to complete the transaction, and according to Forescout CEO Michael DeCesare, the company remains hopeful the deal will go through.

“This is an uncertain time for everyone, as businesses and communities across the world navigate the challenges created by the covid-19 pandemic,” DeCesare said Monday. “We continue to believe that Advent is the right partner for Forescout and we remain committed to completing the transaction in the near-term.”

However, the May 18 announcement indicated that there can be no assurance that Forescout and Advent will be able to reach an agreement on terms.

Advent on February 6 agreed to acquire Forescout for $33 per share in an all-cash transaction, valuing the company at $1.9 million. Crosspoint Capital Partners, a private equity firm focused on the cybersecurity and privacy industries, said it would take a minority stake alongside Advent.

Advent did not disclose reasons for its potential termination of the agreement. The firm’s spokesperson declined to comment.

Ben Axler, founder of Spruce Point Capital, an activist investment firm with a short position in Forescout, said indications the transaction could fall apart surfaced soon after the deal was struck.

“Upon reviewing the proxy statement, we had concerns about the financial projections and how they may or may not have been shared with prospective buyers,” Axler said. “By announcing the transaction early February, [Forescout] did not have to release illustrated guidance for Q1 that would have shone some weakness in their business.”

After reviewing the valuation at which Advent and Crosspoint assigned the business and upon further research on the cybersecurity market, Spruce Point believed there was a high likelihood of a modified or terminated transaction, the activist said.

Forescout’s first-quarter earnings, announced May 11, also weighed on the company.

Forescout reported $57.2 million in total revenue for Q1, a 24 percent decline over the first quarter of 2019. The company attributed the decline to the economic downturn and uncertainty around its pending deal with Advent.

The company reported $14.8 million in license revenue, a decrease of 61 percent over the first quarter of 2019. The company’s net debt also grew.

“The sales of Forescout declined even greater than the most pessimistic projections,” Axler said. “We felt that Forescout, by borrowing on the credit revolver and also by implementing restructuring, was signaling potential underlying problems.”

Advent also expanded its risk factors, the activist noted, signaling potential strain with the transaction.

Forescout’s stock traded down on the announcement to finish at $22.57 per share on Monday, stumbling 23.5 percent from Friday’s close.

According to Axler, shares of Forescout remain overvalued.

“We believe that Forescout is worth in the teens, so with the share price still at $23, we still think there is downside,” he said.

The question remains: How a firm can legally walk away from an acquisition once an agreement is signed?

According to a partner at a software-focused PE firm, this is something they’ve never seen.

“I didn’t know it’s even possible to back away from a take-private, to be honest,” the source said. “Usually you can’t walk away from a deal after you sign it, regardless of what happens in the world or to the financials. So we’re all scratching our heads a bit.”

Advent is not the only firm trying to scrap its deal in light of covid-19.

Carlyle Group and Singapore sovereign wealth fund GIC may be able to walk away from an agreed deal with American Express GBT because of what is essentially a logistical issue, PE Hub reported on May 15.

Spokespeople for Forescout, Advent and Morgan Stanley declined to comment for the story.

Action Item: Read PE Hub’s story on how Carlyle may toast its deal with American Express GBT.