M&A transactions have been few and far between lately, so I almost missed that Vertex, an indirect tax compliance software provider, has initiated a tender offer to acquire Pagero, an e-invoicing network headquartered in Sweden.  Because both companies are public, we can see the thinking behind the deal and the valuation.

Vertex and Pagero: The Business Rationale

On paper, Vertex’s acquisition of Pagero makes strategic sense.  Vertex, which I have written about previously, provides indirect tax determination, compliance, reporting, and document management products.  Vertex derives 90% of its revenue from the US, mostly related to sales taxes.

Pagero, on the other hand, is an e-invoicing network focused on facilitating the exchange of VAT-compliant e-invoices between buyers and suppliers.   Suppliers and buyers increasingly need to be connected to governments to be VAT-compliant.  Pagero provides this connectivity.  Eighty percent of Pagero’s revenue is from its core markets in the Nordics, Central Europe, and South America.  The company has a limited presence in North America.

The investor deck Vertex presented about the acquisition offers a graphic on how the two solutions are complementary for the VAT use case:

A chart showing how invoices from from suppliers to governments to buyers.

Vertex and Pagero announced a partnership in October, but Vertex said this is no shotgun wedding; they had been working together for a year.  It seems the companies are betting more on revenue synergies than cost synergies, but they do give a little handwave to cost synergies:

chart showing sources of shareholder value for Vertex plus Pagero combination.Combining these two businesses, tax determination and a VAT-compliant e-invoicing network, makes Vertex look more like Sovos, which has an e-invoicing network from InvoiceWare and Taxware for tax determination.

The Deal

The Vertex tender offer values Pagero at $555 million, about 8.3x Pagero’s TTM revenue.  This price represents a whopping 77.1% premium to the average price of Pagero stock Pagero for the 30 days before the announcement.  (Vertex noted that its stock traded at 8.5x TTM revenue before the deal was announced.)  Pagero has been growing nicely, with revenue and ARR growing in the 25-35% range for the past few years.  This exceeds Vertex’s growth rate of 15-18%.

Not mentioned in the announcement is that Pagero has a negative EBITDA of about -10 %.  Pagero points out that it has strong EBITDA in its established markets but loses money in its investment/growth markets until it scales the number of buyers and suppliers.  It’s the kind of argument Open Table, Uber, or other businesses with localized network effects make.

Map showing where Pagero makes and loses money.

For its part, Vertex has a positive adjusted EBITDA margin of about 16%, which is low relative to most SaaS businesses at its $500 million scale.  Vertex has a below-average gross margin of about 60% and a way above-average G&A expense of 26%.  On the plus side, R&D and sales expenses are modest compared to most SaaS companies.  The two companies hope to reach the elusive Rule of 40 together.

(It should be noted that both companies have excellent gross and net retention.  In 2022, Vertex had a gross retention of 96% and a net retention of 110%.  Pagero reported customer churn of 1.8% and NRR of 122% for the latest quarter.  You know what they say about death and taxes!)

Silver Lake is financing Vertex’s acquisition of Pagero.  As a result, private equity now owns a piece of three major players in the market.  Vista owns Avalara (having paid 8.8x revenue and a 27% premium in 2022), and Hg and TA Associates own Sovos.  PE firms understand the reliability of death and taxes!

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