In a deal which will have a profound effect on the prospects for the group, Kape has announced the proposed acquisition of LTMI Holdings, the holding company for virtual private network provider Private Internet Access (PIA). PIA is a Denver-based security software business, the addition of which will transform the size of Kape by doubling group revenues (including a stronger recurring revenue base) and increasing adjusted EBITDA by around 2.5 times in FY 2020E. Reflecting that, our earnings estimates increase by around 90% for FY 2020E while our new FY 2021E estimates build strongly on that much larger base. Total consideration is c. US$95.5 million with an enterprise value of c. US$127.6 million. The deal is expected to complete within 45 days and is anticipated to be immediately earnings enhancing. The transaction will create a significant player in the digital privacy market and will enable Kape to expand its footprint in North America with a broader product offering.
Kape will acquire LTMI’s suite of digital privacy products which have built a strong position in data privacy services with over 1 million paying customers, 48% of whom are in the US. PIA is focused solely on paid subscribers which will substantially increase Kape’s recurring revenues.
Kape will acquire LTMI from its co-founders Andrew Lee and Steve DeProspero, for a total consideration of c.US$95.5 comprising c.US$52.9 million cash and c.42,701,548 new Kape ordinary shares. It will be paid in three phases with the cash element and repayment of LTMI’s debt funded through a new US$40 million loan facility and existing resources.
The announcement anticipates that the enlarged group will generate consolidated proforma 2020 revenues of US$120-123 million and Adjusted EBITDA of US$35-38 million with mooted annual cost synergies of US$3.5-4.5 million expected to be achieved within 12 months of completion. Management anticipates around 90% earnings accretion in FY 2020E.
LTMI is expected to add to the cash generation of the existing Kape business having generated around US$16.3 million of adjusted operational cash flow in 2018 with cash conversion of over 100%.
This is a highly significant and transformational deal for Kape which we believe will accelerate its strategy and transport its quest to become a world leader in digital privacy to a new level. It will benefit from a significantly enhanced pool of R&D talent with the addition of PIA’s market-leading development team.