EngageSmart Acquisition By Vista Equity Draws Multiple Downgrades: Analysts Project Steady Growth Amid Fair Valuation Concerns

Several analysts downgraded the rating on EngageSmart Inc ESMT following the announcement of its acquisition by Vista Equity Partners.

Yesterday, the company inked a deal to be acquired for around $4.0 billion or $23 per share in an all-cash transaction.

The purchase price represents a premium of about 23% to the unaffected closing price of ESMT's shares on October 4, 2023, and a premium of about 30% over the volume-weighted average price (VWAP) for the 30 days ending October 4, 2023.

Raymond James analyst John Davis downgraded the rating to Market Perform from Strong Buy.

The analyst says the valuation is fair at 31x of the FY25 adj. EBITDA estimate and does not expect another bidder, especially given the deal was leaked on October 5. 

Davis estimates adjusted revenues and GAAP EPS of $378 million and $0.09 in FY23, $473 million and $0.21 in FY24, and $582 million and $0.30 in FY25, respectively.

KeyBanc Capital Markets analyst Alex Markgraff downgraded the company to Sector Weight from Overweight.

The analyst writes that a higher bid seems unlikely, given the company's current ownership structure, all-cash financing, and 30-day go-shop period.

Markgraff estimates revenue and adjusted EBITDA of $378.3 million (in line with consensus) and $70.3 million in FY23 and $466.5 million (vs. street view of $464.7 million) and $90.4 million in FY24, respectively. 

Also, Needham analyst Scott Berg downgraded the rating to Hold from Buy.

The analyst says the acquisition price is fairly significant and may seem high compared to other software acquisitions in the past two years. 

This reflects the tailwinds to growth and ESMT's impressive margin structure, and the analyst projects double-digit operating margins in FY24.

Berg estimates revenue and operating margin of $378.0 million and 17.7% for FY23 and $449.5 million and 18.0% for FY24, respectively.

ESMT expects to release Q3 FY23 earnings results on November 2, 2023.

Price Action: ESMT shares are down 0.13% at $22.57 on the last check Tuesday.