By Anirban Sen and Milana Vinn
NEW YORK (Reuters) -Buyout firms Francisco Partners and TPG saved hundreds of millions of dollars in their $6.5 billion deal to buy New Relic (NYSE:NEWR) by walking away from negotiations with the business software company in May and then returning two months later with a lower offer, people familiar with the matter said.
The two private equity firms offered more than $90 per share in cash to acquire New Relic in May, a bid that the company rejected as inadequate, the sources said.
Francisco Partners and TPG walked away from the discussions as a result. When they returned in the middle of July with a lower offer, New Relic's business prospects had deteriorated, as it signed up customers at a slower pace amid corporate curbs in technology spending, according to the sources.
New Relic then lowered its price expectations and on Monday agreed to a deal price of $87 per share. The climbdown, which has not been previously reported, was key to the company and the private equity firms bridging their price disagreements.
To aid the deal's financing, New Relic's founder and Executive Chairman Lew Cirne, who owns 10.3% of the company, agreed to roll 40% of his stake into the deal rather than cash out.
This trimmed how much money Francisco Partners and TPG needed to invest in the deal, an attractive proposition given that the equity check accounted for $4.1 billion, almost two-thirds of the deal's value and higher than traditional leveraged buyouts. A debt package they secured from other private equity firms to fund the remainder comprised of a $2.4 billion loan and a $250 million revolving facility, according to one of the sources.
The sources requested anonymity ahead of the company publishing an official account of its negotiations with the private equity firms in the coming weeks. New Relic and TPG declined to comment, while Francisco Partners did not respond to a request for comment.
The deal price represents a 30% premium over the volume-weighted average of New Relic's stock over the last 12 months. The valuation, equivalent to about 6 times New Relic's projected 12-month revenue, is in line with some peers in this space but lower than others, according to RBC Capital, Credit Suisse and Baird analysts.
To make sure it is not missing out on a better deal with another potential acquirer, New Relic negotiated a 45-day 'go-shop' period, during which it will be allowed to engage in deal discussions with other parties. If it finds a better deal, it will have to pay Francisco Partners and TPG a $98 million break-up fee to terminate their contract.
The share reaction since New Relic announced its deal on Monday indicates that most investors do not see a better outcome. The stock ended trading on Wednesday at $83.90, well below the $87-per-share deal price. Some traders said the slightly-higher-than-typical spread reflected a small degree of antitrust risk facing the deal, given that Francisco Partners owns Sumo Logic, a peer of New Relic.
U.S. regulators under President Joe Biden have been stepping up their scrutiny of corporate acquisitions by private equity firms, concerned that owning too many companies in the same space could harm competition. The U.S. Department of Justice is considering whether to challenge Thoma Bravo's $2.3 billion acquisition of business software company ForgeRock Inc, for example, because of potential overlap with some other holdings of the technology-focused buyout firm.
PIVOT STUMBLING
The New Relic deal faces limited risk when it comes to the company's shareholders backing it in a shareholder vote. Francisco Partners and TPG got binding agreements from Cirne and New Relic shareholders Jana Partners and HMI Capital, representing 20% of the shareholder votes to be cast, to back the deal.
New Relic, an anagram of Cirne's full name, develops cloud-based software to help websites and application owners track the performance of their services. The San Francisco-based company counts large companies, including Anheuser-Busch InBev and Adobe (NASDAQ:ADBE) Inc, among its customers.
In 2020, New Relic pivoted to a pay-as-you-go pricing model from a subscription model that software companies typically use. While it initially enjoyed success, it has more recently faced a slowdown. Its pay-as-you-go customers grew 35% last year, but the company projected they would grow 20% this year. Meanwhile, its subscription customers keep declining.
For its latest financial year, New Relic reported annual revenue growth of about 18% compared with peer Dynatrace (NYSE:DT)'s growth of 25%.