Pendulum swings to Potentia Capital in Nitro Software takeover tussle

Two cents per share is all it took for the board of Adobe PDF platform rival Nitro Software (ASX: NTO) to change its tune in a takeover saga that has been running for more than four months, unanimously recommending shareholders accept a revised $2.17 per share deal proposed by Australian private equity investor Potentia Capital instead of an acquisition from KKR-backed Alludo.

The offer represents more than a 20 per cent premium to Potentia's original offer in October 2022 and a valuation of $532 million for Nitro, although the price per share paid out to shareholders could be lifted to $2.20 if the suitor can obtain a relevant interest of three quarters in the software group.

That figure could even hit $2.25 per share if shareholders representing at least a quarter of Nitro's shares opt to receive scrip in Potentia.

These staggered incentives have already appealed to a subset of Nitro's shareholders since they were announced on 23 February, with the suitor's shareholding rising from 19.31 per cent to 24.72 per cent since then - a sharp turn of events given less than a month ago the board was calling on shareholders to accept a $2.15 per share deal from Alludo, a Canadian software multinational that owns the brands Parallels, CorelDRAW, MindManager and WinZip.

A shareholder vote in early February fell just short of the support required to get the Alludo deal over the line, with just shy of 68 per cent of votes in favour when a minimum backing of 75 per cent was needed.

The Canadian bidder then launched an off-market takeover that failed to gain the necessary traction, releasing a statement describing Potentia's hypothetical willingness to consider a $2.20-2.30 per share deal as manipulating the process and not being genuine. 

At that time the board of Nitro, which also specialises in e-signatures, still unanimously recommended the Alludo offer but now the directors have terminated the Alludo implementation deed for a takeover and will have to cop a break fee of $5 million - an amount that is incidentally roughly equivalent to the increased return for shareholders at the lowest rung of Potentia's conditional offers. 

The board however is not making any recommendations about the scrip component of Potentia's offer. At the time of writing, NTO shares were trading at $2.19.

Founded in Melbourne in 2005 with a team of three, Nitro Software was established as a pdf application alternative to Adobe Acrobat, and now has more than 13,000 business customers to its name.

Led by its co-founder and CEO Sam Chandler from its San Francisco headquarters, the company recently reported a 2022 calendar year result that was above the mid-point of guidance with annual recurring revenue (ARR) of US$58.8 million, up 27 per cent, and an operating EBITDA loss of US$11 million.

Cash receipts hit a record for Nitro in the period, up 39 per cent to reach US$71.7 million.

"Against the backdrop of ongoing takeover activity and a challenging macroeconomic climate, these results are a testament to both the strength of our business model and the focus and commitment of our team," the CEO Sam Chandler said earlier this week.

"FY2022 was a pivotal year for Nitro. With the integration of Connective essentially complete, our restructured Go-to-Market (GTM) team is now focused on pursuing significant cross-sell and upsell opportunities across all market segments. We also delivered on our stated commitment to achieve cost savings of US$5.0 million against our internal plan.

"Looking forward, we continue to see broad-based demand for both PDF productivity and eSigning from businesses around the world. Our platform approach and continuous investment in innovation to meet customer needs means we are increasingly differentiated in the market by our ability to offer a full suite of high-trust, high-security enterprise-grade products."

Operational expenses rose by 30 per cent during the year to US$70.9 million, although the company highlights it has made progress towards breaking even on a cash flow basis.