Pivotal Acquisition Corp. CEO Jonathan Ledecky and KLDiscovery CEO Chris Weiler are Merging Companies
Anyone who follows daily news knows that civil lawsuits against corporations aren’t going away. And between emails, texts, and messaging across several devices, it’s clear that data is growing while getting harder to harness. The good news: A recent IPO offers investors a way to bet on both of those trends continuing – with a top-notch management team to boot.
Meet KLDiscovery, an electronic discovery and data recovery provider which is going public through a merger with Pivotal Acquisition Corp. (ticker: PVT), a special purpose acquisition company or SPAC. Pivotal raised money in an IPO to find a target and recently announced a deal with KLDiscovery that will result in a public company with an enterprise value of $800 million. The deal will be put to a shareholder vote later in the third quarter, after which Pivotal will change its name to KLDiscovery.
Here’s how a need for KLDiscovery’s services came about: Record keeping evolved from microfiche and legal copy in the 1990s to scanned digital images stored on computers. By 2000, the Y2K scare prompted serious concern about tracking computer data. Since then, data volume has multiplied, living on physical devices from laptops to thumb drives to iPads with digital trails not only on email but on social platforms from Twitter to Instagram.
All that data can become legally relevant when a court orders discovery of evidence. If a company is compelled to produce large amounts of data that’s dispersed in many places, it usually hires an objective third party to help dig it up. In total, the addressable market is $21.3 billion, according to The Radicati Group.
KLDiscovery has been at the forefront of that business since it was co-founded by CEO Chris Weiler in 2005. Since then, the company has served an impressive client roster, including 65% of the Fortune 500 and 95% of the Am Law 100 firms. Those clients, who range from Apple to Starbucks, have shown a retention rate above 95%.
To foster growth, KLDiscovery has embraced a bold acquisition strategy. The company has executed a string of M&A deals, including bolt-on purchases and transformational acquisitions such as Data recovery and discovery firm Kroll Ontrack.
In late July, KLDiscovery announced two accretive software acquisitions, New York-based Strategic Legal Solutions and Richmond, Virginia-based Compiled. The company has multiple other deals in the pipeline that may close in the near term, including four targets that can generate over $50 million in revenue. Beyond that, there are literally hundreds of possible deals across legal services, software technology, and forensic cyber companies.
One area of potential expansion is data recovery, where KLDiscovery already commands a number one position. The bulk the company’s business is data discovery, but there’s plenty of scope for data recovery to grow from the current level of roughly 15% of revenue.
Importantly, the SPAC sponsor’s CEO is legendary dealmaker Jonathan Ledecky. Mr. Ledecky, who is co-owner of the National Hockey League’s New York Islanders, has had a knack for successful rollups for decades. In the 1990s, the Harvard-educated businessman grew stationery vendor U.S. Office Products through over 200 acquisitions. He will serve an important role in the new company as it hunts for deals.
KLDiscovery will also benefit from the continued ownership of The Carlyle Group and Revolution Growth, who will retain 100% of their existing equity in the transaction. That’s not only a positive because of the private equity firms’ experience managing and growing businesses, but also an indication of their confidence in KLDiscovery.
Such a combination of strong leadership and continued private-equity ownership has proven a hallmark of successful SPACs. A recent example is spa operator OneSpaWorld, (ticker: OSW), which went public through a merger with Haymaker Acquisition and continues to be partially owned by L Catterton. The stock is up over 50% this year.
The Pivotal deal also brings significant financial benefits to KLDiscovery. Much of the cash will go to reduce debt, slashing interest expense by $16 million per year. Leverage will drop sharply from 5.8 times to just 2 times in 2020. That will give KLDiscovery plenty of room to pursue accretive acquisitions both large and small.
The company expects healthy growth in years to come, with Ebitda growing at an annualized 23.8% rate between 2017 and 2020. That forecast could prove conservative if the company lines up major M&A deals.
With the stock trading around $10, investors have a chance to own the business at a reasonable valuation of 10.7 times 2019 adjusted Ebitda. That is significantly below multiples for comparable companies such as 28 times for cloud software firm Blackbaud and 32 times for information management firm Tyler Technologies.
The near-term downside is also very limited. As with any SPAC, investors would get their cash back in the event the deal does not close.
Another plus: the data discovery business should thrive in good economies and bad. For instance, an uptick in Chapter 11 proceedings would trigger strong demand for bankruptcy work.
In these time of turbulent markets and heady valuations, it can be tough to find good bets in growth industries. With a proven track record in a niche industry driven by a structural shift in data, investors have a rare chance to profit from KLDiscovery.
John Jannarone, Editor-in-Chief