Novell’s Only Hope: The Long-Awaited Buyout (NOVL)

March 2, 2010 by Douglas A. McIntyre

If you have followed software companies for more than a decade, you have probably grown accustomed to seeing Novell, Inc. (NASDAQ: NOVL) act as a dead money stock.  The company has gone from having its programs in every computer to data center to Linux.  Yet nothing has ever really gotten the stock off the ground in recent years.  Today the company received a go-private buyout offer from a private equity firm called Elliott Associates.  The value, net of cash, is roughly $1 billion in enterprise value.

Elliott is already a shareholder of Novell with close to an 8.5% stake.  The company has two main funds with more than $16 billion in assets under management.  It has offered to purchase the entire company for $5.75 per share in an all-cash deal.

Elliott noted that this $5.75 price represents a premium of 49% over the Novells’s current enterprise value and 77% over the Company’s 90-day volume-weighted average enterprise value.  This is a 20% premium to yesterday’s price.

As Novell’s cash balance of nearly $1.0 billion represents almost 60% of its current market capitalization, Elliott noted, “we believe that a premium to enterprise value represents the most meaningful measure of the value that our proposal offers stockholders, valuing the Company’s cash at 100 cents on the dollar despite the fact that a significant portion of that cash is overseas and may not be realized in a tax efficient manner.”

Elliott’s offer is subject to a confirmatory due diligence review and negotiation of definitive documentation.  The firm noted that it intends to work with financing sources, but it did go on to note that obtaining financing “is neither a condition of our proposal nor a condition to completing the transaction.”

There is just one small problem here with the deal, although it might not be enough to matter.  Novell has a long history of trading higher than this offer.  It also has a history of trading well under this $5.57 price.  Its range of the last 52-week is $2.97 to $5.05, so this would mark a high that has not been seen since September 2008.

Shares are trading at a premium to the offer in the after-hours session.  The stock closed at $4.75 and shares are trading up around $6.10 in the after-hours session.

Considering the company’s long history, it seems a safe bet that Novell will say any offer around today’s prices is inadequate.  Stay tuned.

JON C. OGG