Flurry of Acquisitions

That's it, folks, it's happening!

Four microcap companies were acquired this past month.

All in different sectors.

HS GovTech Solutions (CSE: HS), a leading provider of SaaS applications for the government, announced its acquisition by a US private equity firm on September 18. The price offered was a staggering 151% premium to the stock's last closing price. The valuation was approximately 3.5 times the annual recurring revenue (ARR) under contract.

Then H2O Innovation (TSX: HEO), a complete water solutions company, also announced its acquisition by a US private equity firm on October 3. This time, the premium was an attractive 68% compared to the last closing price, and the valuation worked out to about 19 times LTM EBITDA.

Subsequently, Opsens (TSX: OPS) followed with a similar announcement on October 10. This time, it's a strategic acquirer in the healthcare space, a $4.5 billion NYSE-listed company (Haemonetics) that will gobble up the target. The premium offered was a respectable 50%, for a valuation of close to 7 times trailing revenues.

And four days later, Spark Power Group (TSX: SPG) also announced a private equity group would acquire it for a 68% premium to the last closing price.

You don't have to take my word when I say Canadian smallcaps are extremely undervalued. But you can't ignore the facts. US capital is coming, and it's coming in a big way. I don't think we've seen the end of it. Why wouldn't US entities capitalize on a strong US dollar and the large discrepancy in valuations across borders?

If you look at these four acquisitions, you can make a few assumptions about why they got acquired:

• HS GovTech was growing and had a sticky and recurring revenue base but needed access to more capital (which private equity can provide more readily).

• H2O Innovation had a lot of recurring or reoccurring revenues, but most importantly, it operates in an industry with strong secular tailwinds (water scarcity).

• Opsens had a strong moat with proprietary medical devices and a significant growth opportunity ahead of itself. It was an excellent fit for a strategic acquirer who could commercialize the product more broadly and efficiently.

• Spark Power Group had some financial difficulties, namely lower-than-expected revenues, pressures on margins, and a breach of financial covenants on its debt.

Now, it begs the question: who's the next target? Let’s speculate a little bit. I’ll venture a few guesses.

Covalon Technologies (TSX-V: COV)

Covalon is a medical device company in the wound care space. They already ran a strategic review process in late 2020, which led to selling one of their divisions (Aquaguard) for $38 million in July 2021. At the time, the CEO mentioned that Aquaguard was their least attractive division, with the least amount of intellectual property, and that the remaining divisions were worth at least as much each. That would equate to a potential value of $76 million or more for the remaining two divisions.

The current market cap is roughly $36 million, and if you remove $9 million of net cash on the balance sheet, enterprise value is $27 million. Fundamentally, the business has also progressed since 2021, having grown revenues by 30% in the last twelve months.

With $25 million in LTM revenues, it's not too hard to imagine this business valued at a 3-4x revenue multiple or $75-100 million in enterprise value. Remember, Opsens just sold for close to a 7x multiple.

Crescita Therapeutics (TSX: CTX)

Crescita is a commercial dermatology company with a portfolio of prescription and non-prescription products. The company owns and commercializes several cosmeceutical brands and owns or licenses the rights to a few skincare treatment products and devices. Crescita also operates a manufacturing facility in Laval, Quebec, to make its products and offer contract manufacturing services to outside customers.

Overall, the revenue profile is fairly diversified across different income streams. Patents or trade secrets also protect some of the company's assets.

The most compelling aspect of Crescita is its valuation. With a market cap of $12 million and $10 million in net cash on the balance sheet, the enterprise value is only a mere $2 million. Compare this to sales of $24 million in 2022. Someone could scoop them up for a nice premium, and it wouldn't result in an egregious valuation at all.

Supremex (TSX: SXP)

Supremex has historically been an envelope manufacturer (the dominant player in Canada) and started diversifying into packaging several years ago to gain exposure to the fast-growing e-commerce segment. It is a good old, boring manufacturing business throwing off a lot of cash.

After missing expectations for a few quarters and telegraphing a temporarily soft outlook for revenues, the stock was almost cut in half from its high of $7.89 earlier this year. The current valuation hovers around the 5x P/E mark with a free cash flow yield of over 30%. Supremex seems like the perfect kind of candidate for a private equity buyer. A larger envelope or packaging manufacturer in the US could also be a likely acquirer.

Bluerush (TSX-V: BTV)

Bluerush is a fast-growing software-as-a-service (SaaS) company in the personalized video space. It shares some similarities with HS GovTech, namely the recurring nature of their revenues, the fact they are not profitable, and that they might need access to more capital eventually.

Bluerush has a significant amount of debt on its balance sheet (for a company of its size). At the current share price of $0.05, the equity value is only a mere $1.7 million. But add the debt, and enterprise value climbs to about $8 million. Given the high debt-to-equity ratio, the equity provides a lot of torque in the event of an acquisition.

If Bluerush were to get a 3.5x ARR multiple like HS Govtech, I estimate the resulting stock price would be about $0.13, or 160% more than today.

D-BOX Technologies (TSX: DBO)

D-BOX is an immersive commercial and entertainment company. With a combination of hardware and software, the company delivers immersive experiences through effects like motion, vibration, and texture.

D-BOX has been around for a long time (public since 2006) and has had its share of ups and downs. With a new CEO, Sebastien Mailhot, since April 2020, the company moved new growth initiatives forward and seems to be hitting its stride.

A few months ago, the company announced it was forming a special committee to review its strategic alternatives, which could potentially lead to a sale of the company. With an enterprise value of approximately $28 million, LTM revenue of $37.5 million and growing, and lots of patents/intellectual property, it's not hard to imagine the company being worth more than its current market cap.

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So there you have it. Five companies that I think would make great acquisition candidates and could fetch solid premiums compared to their current valuations.

I am not recommending any of these companies. I just think they look undervalued and have a higher likelihood of being acquired. (Please read the disclaimer below)

Let's see if I end up being right on a few of them!

Have you got any other ideas? Feel free to write them in the comments below!

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds a position in Covalon Technologies (TSX-V: COV) and BlueRush (TSX-V: BTV). Always do your own research and consult a professional before making investment decisions.