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CynergisTek acquired by Clearwater Compliance: fairness opinion by Craig-Hallum

Announced May 23, 2022 · One-step merger · All cash · DEFM14A filed July 25, 2022
Outsourced Services IT / Technology Services Sponsor: Altaris Capital Partners, LLC (Altaris Health Partners III, L.P.)
Enterprise value
$17.7M
EV / LTM EBITDA
—
EBITDA $-2.9M · -15% margin
EV / LTM revenue
0.92x
revenue $19.3M
DCF discount rate
20.0%–24.0%

Deal terms

ConsiderationAll cash
Price per share$1.25
Premium—
Premium basis—
StructureOne-step merger
Termination fee$0.7M
Reverse termination fee$0.7M
Go-shop30 days · $0.5M reduced fee
Outside date—
FilingDEFM14A · EDGAR index

Implied value per share by method vs. $1.25 offer

Selected companies — EV / LTM Revenue $0.63 – $1.04
Selected companies — EV / CY2022E Revenue $0.54 – $1.02
Selected companies — EV / CY2023E Revenue $0.73 – $1.69

Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.

Opinion of Craig-Hallum to the target board

Delivered May 23, 2022

Discounted cash flow assumptions

Discount rate—
BasisWACC
Terminal value—
Perpetuity growth—
Exit multiple—
Projection period2022E-2026E
Projections usedCynergisTek management projections
Implied value per share—

Craig-Hallum stated it performed a discounted cash flow analysis; the sliced filing text does not include its assumptions or implied per-share range.

Selected public companies (7)

Cross Country Healthcare, Inc. · The Hackett Group, Inc. · Resources Connection, Inc. · NNIT A/S · Computer Task Group, Incorporated · Smart Employee Benefits Inc. · GSE Systems, Inc.

MultiplePeer lowPeer medianPeer highRange appliedImplied per share
EV / LTM Revenue0.3x0.7x2.1x 0.5x–0.8x $0.63–$1.04
EV / CY2022E Revenue0.3x0.6x2.0x 0.3x–0.7x $0.54–$1.02
EV / CY2023E Revenue0.2x0.5x1.8x 0.4x–0.9x $0.73–$1.69

Other analyses

AnalysisSummaryImplied per share
Analysis of Comparable M&A TransactionsCraig-Hallum performed an analysis of comparable M&A transactions it deemed relevant; details not included in the provided excerpt.—
Premiums Paid AnalysisAnalysis of publicly available information for comparable transactions to determine premiums (or discounts) paid over recent trading prices prior to announcement; details not included in the provided excerpt.—
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Management projections

Projection yearYear 1Year 2Year 3Year 4CAGR
Revenue$24.2M$29.4M$35.4M$42.5M20.6%
Revenue growth25.4%21.5%20.4%20.1%
EBITDA$-1.0M$1.4M$3.9M$6.2M—
EBITDA growth——178.6%59.0%
EBITDA margin-4%5%11%15%
Implied EV / EBITDA—12.6x4.5x2.9x

Year-1 growth is against LTM at announcement ($19.3M revenue, $-2.9M EBITDA); later years are year over year.

Craig-Hallum reviewed a detailed financial projection model of CynergisTek for the years ending December 31, 2022 through 2026, prepared and provided by CynergisTek management, along with audited 2020-2021 financial statements and unaudited Q1 2022 interim statements. Specific revenue and EBITDA figures for the projection years are not disclosed in the provided excerpt. Craig-Hallum relied on management as to the reasonableness and achievability of the projections.

Process notes

Single fairness opinion delivered by Craig-Hallum Capital Group LLC to the CynergisTek Board of Directors on May 23, 2022 (oral, confirmed in writing same date); opinion approved by a Craig-Hallum fairness committee. America's Growth Capital (AGC) was separately engaged as financial advisor to solicit alternative proposals during the go-shop period but did not deliver an opinion. The merger agreement included a 30-day go-shop (with 5-day extension for Excluded Parties) running to June 22/27, 2022, with a reduced $470,000 termination fee for a Superior Proposal signed before June 23/28, 2022, and $710,000 thereafter; Parent owed a $710,000 reverse termination fee. Price was negotiated down from earlier proposals (Board had sought $1.47-$1.50; Parent proposed $1.35) to a final $1.25 per share. Craig-Hallum used net debt of approximately ($0.8) million as of March 31, 2022 and approximately 13.9 million diluted shares as of May 13, 2022. Buyer is backed by Altaris Capital Partners.

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