Tufin Software Stock: Gets Acquired By Turn/River Capital (NYSE:TUFN)

After successfully raising $1.35 billion for its fifth closed-end fund “Turn/River Capital V” earlier this week, private equity software investment firm Turn/River Capital immediately wasted no time putting the new funds to work with the $570 million acquisition of cybersecurity automation software provider Tufin Software (NYSE:TUFN) or “Tufin” on Tuesday:

Under the terms of the agreement, Tufin shareholders will receive $13.00 per share in cash, representing a premium of approximately 44% over Tufin’s closing share price on April 5, 2022, the last full trading day prior to the transaction announcement, and a premium of approximately 54% over Tufin’s one-month volume-weighted average closing price through April 5, 2022. Upon completion of the transaction, Tufin will become a private company and will partner with Turn/River to further accelerate its mission of helping enterprise customers use policy-driven automation to address the security threats of tomorrow.

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The agreement includes a 30-day “go-shop” period expiring May 5, 2022, which allows the Board and its advisors to actively solicit, initiate, encourage or facilitate alternative acquisition proposals from third parties. The Board will have the right to terminate the merger agreement to enter into a superior proposal subject to the terms and conditions of the merger agreement. There can be no assurance that this “go-shop” will result in a superior proposal, and Tufin does not intend to disclose developments with respect to the solicitation process unless and until it determines such disclosure is appropriate or otherwise required.

The transaction is expected to close in the second quarter of 2022, subject to customary closing conditions, including approval by Tufin shareholders and receipt of regulatory approvals. Upon closing of the transaction, the Company’s common stock will no longer be listed on any public market. The Company will continue to be headquartered in Tel Aviv, Israel.

Ruvi Kitov, Chairman, CEO and Co-Founder of Tufin and Reuven Harrison, CTO and Co-Founder of Tufin, have entered into voting agreements pursuant to which they have agreed, among other things, to vote their shares of Company common stock in favor of the transaction.

To be perfectly honest, Tufin hasn’t exactly been a success story despite its focus on the red hot cybersecurity market.

The company went public at $14 per share three years ago. In late 2019, certain shareholders managed to dispose of their holdings at $17 per share in a secondary offering but soon afterwards Tufin started to experience sales challenges partially due to the outbreak of COVID-19 as many customers delayed purchases as their focus shifted to the health and safety of their employees along with executing business continuity plans.

In early 2021, Tufin surprised market participants by moving to a subscription model which is expected to take about three years to complete.

Over the course of the past year, the company improved execution and made good progress on the transition to subscription. Despite some revenue headwinds from the business model transition, Tufin managed to grow sales by 10% year-over-year. Annual recurring revenue (“ARR”) increased by 19% and cloud bookings were up 40%.

At the end of Q4, the company had cash, cash equivalents and marketable securities of approximately $90 million, sufficient for another six years at the current rate of cash usage.

Personally, I would be surprised to see the company fetching a higher bid in the 30-day “go-shop” period given Tufin’s less-than-stellar growth, operating cash burn and lack of scale in a competitive market environment.

With the Turn/River Capital bid well above the stock’s highest closing price witnessed over the past year, I firmly expect a majority of shareholders to approve the acquisition and the deal to close before the end of this quarter.

Bottom Line:

In its three years as a public company, Tufin hasn’t exactly covered itself with glory but at least part of the underperformance can be attributed to the impact of the pandemic.

My personal Tufin track record is even worse as I recommended the shares above $15 in February 2021 and did not have the guts to move to an outright “buy” rating in May with things apparently stabilizing and shares trading near all-time lows. I exited my position approximately 12 months ago at a sizeable loss.

While I do not expect the 30-day “go-shop” period to result in a superior offer, investors should keep their shares just in case I will be proven wrong on the company again.

Expect Tufin to schedule a special shareholder meeting in the coming weeks. Assuming shareholder approval, the transaction should close soon afterwards.