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Why are Darktrace shares climbing after private equity proposal?

The Darktrace share price has jumped since the announcement that private equity firm Thoma Bravo may be considering taking CEO Poppy Gustafsson’s (pictured) company private. While the news has not been confirmed, Thoma Bravo could be a good fit for the cybersecurity firm.

Since the Financial Times broke news that Thoma Bravo was considering taking cybersecurity firm Darktrace [DARK.L] private on 15 August, the stock has climbed 23.3% to close at 511.2p on 31 August.

Darktrace shares have, however, pulled back since 23 August, when a source from the company told the Business Weekly that it was not looking to sell out. Takeover rules state a former offer must be made within 28 days, which means the private equity firm has until 12 September to lodge a bid.

If it does happen, it’d spell the end of a short public life for the beleaguered stock. When Darktrace made its debut at the end of April last year, its share price surged 43% on the first day.

It was seen as a landmark event for the London Stock Exchange, which just a month earlier had suffered the embarrassment of Deliveroo’s [ROO.L] IPO flop. It was hoped that Darktrace’s successful float would help to lure other UK firms to choose the capital over New York.

Yet despite surging more than 300% from its IPO price of 250p to a high of 1,003p on 24 September last year, the Darktrace share price pulled back dramatically, setting a 52-week low of 281.3p on 5 July.

The Thoma Bravo news has helped the share price to recover somewhat. It’s up 36.5% in the past month as of 31 August and up 21.7% year-to-date.

 

Thoma Bravo a good fit

The financial terms of a potential deal haven’t been mentioned. The general consensus is that the move would be good for the company, whose market cap as of 31 August was £3.6bn.

“This deal could make sense given Thoma Bravo’s recent activity in the cybersecurity space and an attractive current valuation for shares of Darktrace,” Piper Sandler analyst Rob Owens wrote in a note to clients seen by Bloomberg.

On paper, Thoma Bravo would be a good fit for Darktrace. The US private equity firm has been spending big on other cybersecurity companies. It snapped up Sophos for $3.9bn in 2020 and announced last month that it has agreed to acquire Ping Identity [PING] for $2.8bn — the deal is expected to be completed in the fourth quarter of 2022.

According to David Reynolds, an analyst of disruptive technology at Davy, Darktrace needs more investment in research and development and Thoma Bravo should have the resources to help it, reported The Times. Reynolds added that he wouldn’t be a surprise to see other suitors make a play for the company and a bidding war ensue.

Reputational risks weighing on value

A takeover would also mean that shareholders should receive fair value for the company. The valuation has been weighed down by its association with Mike Lynch.

Its founding investor is facing fraud charges in the US over the sale of Autonomy to HP [HPQ] in 2011, although he has denied any wrongdoing. Lynch no longer has any involvement with Darktrace.

The reputational risk associated with Mike Lynch, however, has meant the share price hasn’t been reflecting the fact that the company raised its full-year profit margin guidance in July to 19.5%. The company is seeing strong customer growth and has major clients including McClaren and Belgian brewing company AB InBev [ABI.BR].

JPMorgan analysts highlighted this reputational risk earlier this year when it initiated coverage with an ‘underweight’ rating. The Thoma Bravo news hasn’t changed their view on the investment case as they’ve reiterated their rating, MarketBeat data shows. Their price target of 320p implies a downside of 37% from the 30 August closing price.

Conversely, Berenberg analysts reiterated a ‘buy’ rating back in July along with a price target of 500p, implying a marginal downside.

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