Some Caveats in Considering Blackboard as a Buyout Target (BBBB)

Blackboard Inc. (NASDAQ: BBBB) finds itself as the latest rumored acquisition candidate for private equity.  The company is worth about twice as much as when it came public in 2004 and its education-theme in the U.S. and in Canada put it in the cross hairs of private equity interest.  Maybe.

In first hour trading this morning, shares of Blackboard are trading near $42.90 per share, up about 79 cents, more than 1.8%.  Today’s rise adds to the 6.3% increase posted earlier this week.  Headquartered in Washington D. C., Blackboard is an emerging multimedia and graphics software provider with online educational course offerings.  The company’s market value is in the $1.5 billion range.

Prior reports from Bloomberg were out saying that Providence Equity Partners Inc. is the newest entity putting together buyout overtures for Blackboard’s shares.  Other reports had the company considering a bid from Hellman & Friedman LLC.  In April, Blackboard said it is working with Barclays Capital to review unsolicited buyout offers.

During the prior two trading days, the shares have surged over 6%, on two-day volume more than 3.4 million shares, compared with an a single day’s average volume of 687,000 shares.

Earlier this year, analysts at Stifel Nicolaus estimated that Blackboard may attract bids from private equity firms as high as $55 per share. In earlier statements from Blackboard Chief Executive Officer Michael Chasen indicated a commitment to “the best interests of our shareholders” and “a focus on the company’s strategic plan.” That seems to us an openness to attractive offers at such time as they may materialize.

Blackboard traded more than 2 million shares yesterday.  Shares opened at $41.51 and traded in a price range of $41.33 to $44.40, before closing at $42.17, up 9 cents.  Blackboard’s shares realized an 6.3% increase over Monday’s close of $39.66.  The 52-week price range is $32.55 to $50.26.

Of late, reaction from the reported players has been very tight-lipped and the reports are all full of “no comment”… which is technically a comment on its own.

The consensus price target from Thomson Reuters is actually north of $49.00, more than 16% higher than the current price even after a near-term buyout premium is already in the stock.  The question would boil down to whether or not a private equity group would be able to milk more earnings power out of Blackboard.  Thomson Reuters has estimates of $1.84 EPS for 2011 and $2.15 EPS for 2012.  Using a $2.00 mid-point, this already trades at about 21-times a forward blended earnings estimate.  That is not cheap and it is not “screaming cheap stock” on the surface if you look at the balance sheet.

Our take is that perhaps the company is evaluated wrongly by the investment community.  Maybe it is the communications systems for military, government, and corporate clients which is where the real value upside is.  The company has already increased expectations for its free cash flow and perhaps the thought is that a private equity firm can change the image and rebalance the revenue mix to greatly get past what the company sees as being $80 to $90 million for free cash flow targets this year.

Investors, traders, and speculators need to all take note that this one was under $40 before the most recent buyout rumors surfaced.  Shares also spiked severely higher from $37 to $48 back in April on prior reports.  As you can see, the reaction since has been met by more than some market skepticism.  Anything is possible and value is something that depends upon the eye of the beholder.

As with all reports on private equity, these should all be considered hearsay or rumor until they have been confirmed.

JON C. OGG