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Merger Analysis: Zeta Global's Acquisition of LiveIntent and Its Implications

Summary:


  • On October 8, 2024, Zeta Global announced an agreement to acquire LiveIntent for $250 million, including $77.5 million in cash and $172.5 million in stock. The deal also features potential earnouts based on Adjusted EBITDA growth and margin targets, with a maximum of $25 million per year for three years.

  • After considering the dilution from approximately 5.42 million new shares and potential earnouts, we estimate a price floor of about $30.30 per share for ZETA..

  • We initiate our coverage with a "buy" recommendation and set a price target of $32.00, indicating an upside of 19.50% at the time of publication.


Catalyst


On October 8, 2024, Zeta Global (NYSE:ZETA), announced it has entered into a definitive merger agreement to acquire LiveIntent for a total consideration of $250 million, subject to customary adjustments, in the form of $77.5 million in cash-on hand and $172.5 million in common stock at closing [1]. The agreement also provides for a potential earnout of 50% cash and 50% stock tied to significant Adjusted EBITDA growth and sustained margin expansion targets in each of fiscal years 2025, 2026, and 2027 [1]. The maximum potential earnout consideration is $25 million per year for each of three years [1]. ZETA also agreed to issue $25 million in Performance Stock Units to the LiveIntent management team tied to certain perfromance and retention targets for fiscal years 2025, 2026, and 2027 [1]. The deal was announced to be successfully completed as of market open of October 21, 2024 [3].


Analytical Framework Outline


We begin by outlining the general information necessary for the analysis, including relevant share counts, historical revenue levels, and the price-to-sales (P/S) ratio as the primary value driver. The transaction costs are addressed in three parts. First, the core transaction cost consists of a cash and stock offer. Second, there is a contingent earnout based on EBITDA and margin targets, as specified in the press release. Third, an additional contingent earnout, linked to operating statistics. After factoring in all associated transaction fees, relative to the closing price of $31.84 per share on our reference date of October 7, 2024, we estimate a price level that fully reflects the costs involved.


General Information


Based on the latest quarterly filing, there were 192.79 million class A shares outstanding and 27.15 million class B shares oustanding. With the Class to B to A conversion rate of 1:1, this makes up a total pre-deal share count of 219.95 million [1]. Furthermore, its latest full year revenue was 728.70 million [1]. Given our aforementioned reference price, this gives us a reference P/S multiple of 9.6 x.



Impact Analysis


We begin by assessing the dilutive effects arising from both the core transaction and any contingent earnout provisions. Following this, we evaluate the direct cash-per-share impact to finalize an estimate that fully accounts for the acquisition costs. It is important to note that our analysis assumes all earnout provisions will be realized, in an effort to incoporate a margin of safety into our approach. Additionally, we maintain a constant price-to-sales (P/S) multiple in both pre- and post-transaction scenarios to establish our base case.

Beginning with stock dilution resulting from the core transaction, which includes $172.50 million to be funded through share issuance, we estimate that approximately 5.42 million shares will be issued, calculated using the treasury stock method [1]. Additionally, the contingent earnout, tied to EBITDA and margin targets over a three-year period, is expected to require a further share issuance of $37.5 million, leading to 1.18 million shares issued if the contingency is met. Finally, existing shares could face further dilution due to the contingent earnout in the form of performance stock units (PSUs), which we assume will be fully exercised, resulting in an additional 0.79 million shares issued.


We directly subtract cash relative to the updated share count when constructing our implied price floor estimate. The $77.5 million in cash from the core transaction is divided by the newly estimated diluted share count, with a similar approach applied to account for the $37.5 million contingent earnout provision, ensuring total cash per share is appropriately captured in our estimate.


With the reference sales multiple set at 9.6x and accounting for the full dilutive impact from share issuance and direct cash expenses related to the transaction, we arrive at an estimated price floor of approximately $30.30 per share for ZETA. The summary of our calculations is as follows:



Important Considerations


There are several important considerations regarding the key assumptions made in constructing our base case estimate. First, we assumed the occurrence of contingent payouts, which notably exerts downward pressure on our estimates. If these provisions are not triggered, our calculations would yield the following:



Secondly, we assumed a constant pro-forma revenue multiple based on the reference multiple derived from our reference price at the specified date. While this assumption is theoretically weak, it rests on two key implied factors. The first is that revenue will likely increase post-transaction due to the addition of LiveIntent’s assets, publisher network, and channel capabilities [3]. The second implied assumption is that this revenue growth will be offset by the increase in share dilution, which we considered when constructing our revenue per share estimate.


Given the significant price implications resulting from the key assumptions in our research, we present the following table. It outlines our price floor estimate at various P/S ratios, against a binary outcome based on whether the contingent earnout provision materializes.


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