Mitel Goes Private

Mitel this morning announced it has entered a definitive agreement to be acquired by a Searchlight Capital Partners-led investor group for about $2 billion. After talking to the company and doing some backwards math, I calculate the deal as closer to $1.93 billion, which would include about $580 million in debt and provide $1.34 billion to shareholders, representing about an 10% to 11% premium over yesterday's closing stock price.

This move is something I've felt coming for a long time. It's not that I'd heard any Wall Street rumors, as Mitel certainly hadn't put itself up for sale, but I just felt the company would be better off being privately held. After all, anyone who has followed Mitel over the past five years knows it has been trying to make the pivot from a premises-based to a cloud-first company. Mitel was actually the first on-premises vendor to offer its solution in a virtual machine, which you consider as the early days of private cloud, and a decade ago its acquisition of Inter-Tel, brought channel partners and installed base, began fueling the move to the cloud. More recently, Toshiba's North American business gave it more seats to convert, and ShoreTel gave it an excellent multi-tenant platform and massive installed base – a critical asset as converting your own customers is much easier to do than gaining new ones.

Mitel seems to have all the pieces it needs now -- a large installed base and the ability to deliver private, public, or hybrid clouds. Every organization I talk to today has a strategy to move its communications to the cloud, but that doesn't always mean public cloud and Mitel can deliver a cloud of any flavor. So, given that, why go private?

The answer is speed and flexibility.

As a publicly traded company, Mitel has needed to balance a number of competing priorities, including using its capital to pay down debt or buy back shares. Now the company has greater flexibility to invest where needed to make the hard pivot to the cloud.

In addition, Mitel has had to worry about hitting its quarterly revenue numbers to keep shareholders happy -- a goal that's diametrically opposed to moving to the monthly recurring revenue (MRR) model that comes along with the cloud-first strategy. Whereas the legacy premises model brings in the money upfront, the MRR model recognizes it over the length of the contract period, and so is revenue and margin dilutive in the short term. The provider benefits from a cloud contract after three-plus years, but making it to that point is a challenge. Going private gives Mitel the breathing room it needs.

It's important to note, too, that the majority of UCaaS revenue has been from the North American market, with Western Europe poised to make the shift next. From my conversations with Mitel, I know the company wants to be ready to capture the opportunity in that region, and it can't afford to dance around cloud deals to hit its quarterly revenue numbers. Going private lets Mitel go all-in on the cloud and be aggressive in ensuring its channel is ready to flip the base when the cloud light goes on in Europe.

Searchlight's investment is certainly a thumbs-up for Mitel CEO Rich McBee, his management team, and strategy. Over the past year, the UCaaS market has been rife with rumors about which companies might go private or consolidate through acquisition. RingCentral and 8x8 have been the subjects of many go-private rumors, for example, and Searchlight and company may have looked at those businesses before grabbing Mitel. However, these UCaaS pure-plays have yet to prove that they can truly scale and be profitable in the long term. The big advantage Mitel has is its installed base, which is a big advantage in the race to the cloud.

Another point worth noting is that I don't believe Elliot Management, which had apparently prodded the ill-fated Mitel-Polycom merger of 2015 (see related No Jitter post), had any influence here at all. At the time Mitel was pursuing Polycom, Elliot held an equity investment of about $100 million in Mitel. In the past year, however, Elliot has reduced that stake.

Searchlight has plenty of cloud experience, and I believe it'll be an excellent partner for Mitel as its makes its cloud transition. As examples of its experience and interest in the cloud, Searchlight was one of the investors that took Rackspace private, and had been rumored to be on the hunt for BroadSoft at the time that company was acquired by Cisco. Also, from what I understand, Searchlight's style isn't to rip apart the management team like we have seen with other UC vendors, such as Polycom, in being taken private.

Mitel's management team stands alone in its proven ability to manage cash, debt, and working capital with an aim of transformation. Just a few years ago, the company was a small regional player with a footprint in Canada, but now it's a billion-dollar organization with presence globally. I've compared the combination of CEO McBee and CFO Steven Spooner to be the UC equivalent of Star Trek's Kirk and Spock, with McBee settinhg out his vision and Spooner figuring out the math behind it. There will be no management shuffle here, and McBee and company, along with support of the Searchlight funds, will now get a shot at transforming Mitel without the handcuffs of Wall Street holding it back.

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