Private Equity Firms Taking SkillSoft Private

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In fits and starts, the private equity market is making a comeback, at least for smaller deals below $2 billion. Just look at today's buyout: SkillSoft's (SKIL) management has agreed to take the company private in a $1.1 billion.

The private equity sponsors include Berkshire Partners, Advent International and Bain Capital Partners. There was no disclosure regarding the financing on the deal. Whatever the debt involved, it looks like the transaction is fairly cheap.A Look at SkillSoft

Founded more than 20 years ago, SkillSoft has become a leading provider of e-learning for companies and governments. A key part of its growth strategy has been acquisitions, such as for SmartForce in 2002 and NETg in 2007.

Through this dealmaking, SkillSoft now has a platform that includes more than 30,000 education titles in 19 languages and a sophisticated learning management system. Its focus is on corporate topics, like Six Sigma, project management and IT skills.

SkillSoft also has a salesforce of more than 240 and over 3,000 customers, of which 55% are in the Fortune 500 and 24% from the Global 2000.

The problem? The recession has been grueling. As unemployment ballooned, the need for employee education has deteriorated. At the same time, customers needed to find ways to cut back on costs.

Even so, SkillSoft has been able to generate strong cash flows. It helps that the company has lots of scale and a large base of customers that continue to buy software.

Take a look at SkillSoft's latest quarterly report. While revenues declined 3% to $80.4 million, net income was $19.6 million, or $0.21 per share, up from $12 million or $0.12 per share in the same period a year ago. Adjusted EBITDA was $32.1 million. No doubt, it certainly helps that the company has gross margins at a juicy 91%.

Cheap Valuation?

Based on SkillSoft's fiscal 2010 projections, the buyout transaction comes to roughly 3.5 times revenues and 9.5 times adjusted EBITDA. This is in line with other education operators, like Devry (DV). The difference is that SkillSoft's results have been muted by the recession. As the economy eventually comes back, there is likely to be higher growth in revenues and cash flows.

There are also long-term factors driving the e-learning market. IDC sees worldwide growth of 11% for 2008 to 2013 (this detail is from SkillSoft's investor presentation). And SkillSoft is making efforts to expand into other countries.

All in all, SkillSoft's buyout looks fairly attractive to management and its private equity investors, so long as the economy improves. But this is likely to attract other interested parties and may ultimately force a higher valuation on the deal. After all, SkillSoft's stock is now trading at $11, which is above the proposed $10.80 buyout price.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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