Mitel’s troubled days as public company set to end with $2-billion offer

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Mitel Networks Corp., one of Canada’s oldest and most valuable publicly traded technology companies, is set to be taken private after accepting an all-cash US$2-billion offer from private equity firm Searchlight Capital Partners LP.

Stock in the Ottawa-based enterprise telecommunications technology firm on Tuesday traded at or slightly higher than Searchlight’s US$11.15-a-share bid – representing just a 10-per-cent premium over Monday’s price – reflecting muted anticipation Mitel could find a better deal during a 45-day “go-shop” period under the deal terms.

If Mitel strikes a definitive agreement with a rival bidder, it will have to pay a relatively modest US$17.65-million “break fee” to Searchlight, although the private-equity firm, co-founded by former Ontario Teachers Pension Plan private-capital head Erol Uzumeri, has the right to match any rival bid. “I’m sure the bankers are dialing away,” Mitel chief executive Rich McBee said.

For billionaire chairman Terry Matthews, a sale would represent a disappointing end to his second stint with Mitel, which he co-founded 45 years ago, helping to put Ottawa’s technology sector on the map.

Since he bought back in to Mitel 18 years ago, the company had become a leading consolidator of the declining market for “on-premise” communication systems for medium-sized enterprises. But Mitel, which went public for a second time in April, 2010, at US$14 a share, struggled to create shareholder value and Mr. Matthews gradually sold close to 90 per cent of his stake. He now holds just three million shares, or 2.5 per cent of the stock.

Mitel attempted to branch out in 2015 by buying Mavenir Networks of Dallas for US$560-million, heralding the purchase as an opportunity to tap into the emerging 5G wireless technology market. But Mitel investors preferred its conservative consolidation strategy and punished the stock, prompting management to dump the business 19 months later at a loss.

After its attempted $2-billion purchase of industry rival Polycom Inc. was trumped by a higher bid in 2016, Mitel attempted a third transformative deal, buying California-based ShoreTel Inc. last year for US$530-million, making it the second-largest player in the emerging field of providing communications over the cloud to business customers.

Earlier this year Mr. McBee stated Mitel’s days as a consolidator in a declining industry were done and that it would focus on shifting customers to its cloud-based business, which is growing by more than 20 per cent a year and offered the opportunity for Mitel to charge monthly revenues rather than record one-time sales, and offer additional digital services. Management forecast that net revenue would stabilize this year as gains in the fast-growing business – which accounted for 19 per cent of Mitel’s US$1.3-billion in revenues last year – started to more than offset 4-per-cent to 6-per-cent declines in the legacy business.

But the management team acknowledged the transition would disrupt its results for some time: While the sale of conventional on-premise equipment yielded an average of US$365 per user and continuing revenue of just over US$3 a month after, an initial cloud sale cost Mitel US$250 upfront, but would bring vastly better returns over time as it subsequently brought in US$34 per month per user. With less than 10 per cent of its 70 million customers having made the transition, chief financial officer Steve Spooner said Mitel could add billions of dollars to annual revenues if it moved most of its existing customers to the new solution.

“Mitel is driving a radical pivot to the cloud to a cloud recurring business, [creating] some near-term headwinds, but is the right thing to deliver long-term shareholder value,” Mr. Spooner said at Mitel’s investor day in February.

But the stock continued to mostly linger under US$10 – where it has been trapped for most of the eight years since its IPO. Mitel also commanded a far lower valuation multiple and total enterprise value than smaller pure-play cloud rivals 8x8 Inc. and RingCentral Inc.

Searchlight “obviously liked the company and realized what a difficult story Mitel has been” to tell public investors, said Mr. McBee, who will remain as CEO should Searchlight’s unsolicited offer prevail. “Having one shareholder who is aligned with our strategy will make it a bit easier … the reality is, in today’s market, making this transition is easier as a private company.”

Investment bank Jefferies LLC and law firms Paul Weiss Rifkind & Garrison LLP and Osler Hoskin & Harcourt LLP are advising Mitel on the deal, while National Bank Financial is advising the Mitel board. Evercore and Wachtell, Lipton, Rosen & Katz and Goodmans LLP are advising Searchlight.