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Sinch Acquires Pathwire, the Leading Email Delivery Platform, and Intends to Carry Out a Directed Share Issue Secured by Investor Undertakings

Sinch AB (publ), a global leader in cloud communications for mobile customer engagement, announced that it has entered into a definitive agreement to acquire Pathwire, the leading cloud-based email delivery platform, including its Mailgun, Mailjet and Email on Acid products for developers and marketers. Sinch will pay the sellers a cash consideration of USD 925 million and 51 million new shares in Sinch. Using yesterday’s closing Sinch share price of SEK 165.9, and USD/SEK exchange rate of 8.8, this corresponds to an enterprise value of approximately USD 1.9 billion, or SEK 16.6 billion.

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Pathwire provides a best-in-class email deliverability platform for transactional and marketing email. Built to remove the complexities of the world’s most-used digital communications channel, Pathwire ensures that the right messages are delivered to the right person at the right time. Over 100,000 businesses use Pathwire’s products to engage with their customers, including major brands such as Lyft, Kajabi, Microsoft, Iterable, and DHL.

The acquisition of Pathwire means that Sinch becomes one of the very few, global CPaaS providers that can deliver leading quality at scale across all the main digital communications channels which businesses use to engage with their customers.

“Every form of digital communications has its unique benefits, and delivering high quality at scale requires both extensive technical capabilities and deep subject matter expertise“, comments Oscar Werner, Sinch CEO. “Together with Pathwire, we will be able to offer a best-of-breed product set, across messaging, voice and email, that empowers businesses and developers to craft an unmatched, digital, customer experience.”

Businesses turn to cloud-based email service providers to avoid costly in-house solutions and to ensure that each message reaches its recipient as intended. Through its feature-rich email API, email testing tools, and accomplished deliverability services, Pathwire ensures that emails are received with minimum delay, that they are showcased in customers’ prime inbox, and that messages render pixel-perfect on every device and with every email provider. Together with a highly efficient, online go-to-market model, these product strengths have allowed Pathwire to outgrow the competition and deliver consistently high growth and high profitability.

Pathwire’s offering is centered around three core products:

  • Mailgun offers powerful APIs that let developers integrate automated email messages into products and workflows. With unmatched deliverability rates, Mailgun is the preferred choice for developers looking to send, receive and track emails using a cloud-native, scalable infrastructure.
  • Mailjet offers a drag-and-drop email builder and suite of APIs that empower marketers to increase customer engagement and maximize marketing ROI. Its powerful tools cater for the entire life cycle of an email; from design and creativity to testing, deliverability, and analytics.
  • Email on Acid further improves deliverability rates, through an automated pre-deployment checklist, and ensures that every email message renders well across different email providers and devices.

“Sinch and Pathwire are a natural fit: both companies have built their businesses around product excellence, a commitment to positive results for our customers, and a focus on clear, measurable outcomes. I’m proud of what the Pathwire team has accomplished, and I’m tremendously excited about this next step on our journey and the many opportunities we can unlock together”, comments Will Conway, Pathwire CEO.

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“We are proud of what we accomplished with Will and the Pathwire team over the past few years, investing in product initiatives, leadership, and M&A, including the acquisitions of Mailjet and Email on Acid,” said Hudson Smith, a Partner at Thoma Bravo. “Sinch is the perfect strategic partner to support Pathwire and continue to build on its market-leading position as the email communications partner of choice for developers and marketers.”

Research by Technavio estimates that the worldwide market for email delivery is worth USD 16 billion. More than 60 percent of this amount relates to transactional email, which are delivered in response to an action by an end user, such as booking confirmations, receipts and password resets.

Financials

In the twelve months ending December 31, 2021, Pathwire is expected to record revenues of USD 132 million, Gross Profit of USD 104 million, and Adjusted EBITDA of USD 55 million. This corresponds to a gross margin of 79 percent and an adjusted EBITDA margin of 42 percent. The business employs around 290 people and is headquartered in San Antonio, Texas.

Organic revenue growth over the past years has consistently exceeded 30 percent per year with a gross margin close to 80 percent and an Adjusted EBITDA margin above 35 percent. The transaction is growth and margin accretive to Sinch.

The transaction is expected to generate significant revenue synergies from the cross-selling of Sinch and Pathwire products to each other’s customer base. Upon closing of the transaction, Pathwire will also be able to leverage Sinch’s established sales presence in 47 international markets to drive further growth with net new enterprise customers. One-off integration costs are estimated to reach around SEK 75 million over 18 months.

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Financing

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Pathwire will be acquired through a merger between a subsidiary of Sinch, Pegasus Corp One, which is registered in Delaware.

The acquisition will be financed through a combination of cash, equity and debt facilities. Upon closing, Sinch will pay the sellers, which include funds managed by Thoma Bravo and Turn/River Capital, a cash consideration of USD 925 million. The sellers will also receive 51 million new shares in Sinch, which will be delivered to the sellers not earlier than February and May 2022. Using yesterday’s closing Sinch share price of SEK 165.9, and USD/SEK exchange rate of 8.8, this corresponds to an enterprise value of approximately USD 1.9 billion, or SEK 16.6 billion.

Sinch intends to call for an extraordinary general meeting to authorize the board of directors to resolve on the issue of the consideration shares for the Pathwire acquisition. Shareholders representing in excess of 48 percent of the total number of shares and votes in Sinch have undertaken to vote in favor of such authorization. The notice for the extraordinary general meeting will be published separately.

Sinch further intends to resolve on a directed share issue of approximately 40 million shares, equivalent to approximately USD 750 million. Canada Pension Plan Investment Board (“CPP Investments”), Temasek, SeaTown Master Fund (“SeaTown”), and SB Northstar LP, a fund managed by SB Management, a wholly owned direct subsidiary of SoftBank Group Corp, alongside certain existing shareholders, have undertaken to subscribe for shares in the directed share issue, which is expected to be settled and paid for with one part in October and one part in December 2021. The details of the directed share issue will be published separately.

Sinch has a financial target to maintain net debt/adjusted EBITDA below 3.5x over time. In anticipation of upcoming transactions, Sinch had a net cash position of SEK 11.2 billion at the end of Q2 2021. This corresponds to a net debt/adjusted EBITDA-ratio of -9.6x. Several previously announced transactions are expected to affect this ratio ahead:

  • On 17 February, Sinch announced the acquisition of Inteliquent for a total cash consideration of USD 1,140 million. The transaction is expected to close in H2 2021.
  • On 9 June, Sinch announced the acquisition of MessageMedia. Sinch will pay a total enterprise value of USD 1.3 billion, with a total cash consideration of USD 1.1 billion and 11 284 870 new shares in Sinch. The transaction is expected to close in H2 2021.
  • On 22 September, Sinch announced the acquisition of MessengerPeople. Sinch will pay a total enterprise value of EUR 48 million, with a total cash consideration of EUR 33.6 million and EUR 14.4 million paid in the form of new shares in Sinch. The transaction is expected to close in Q4 2021.

On a pro forma basis, as if the acquisitions of Inteliquent, MessageMedia, MessengerPeople and Pathwire had been completed already at this point, and the directed share issue of approximately 40 million shares referenced above had already been completed, Net debt/Adjusted EBITDA would have been approximately 2.7x. This calculation of pro forma Net debt/Adjusted EBITDA includes Adjusted EBITDA in acquired entities over the past 12 months. Cash generation and earnings growth is expected to reduce this ratio going forward.

When the acquisitions of MessageMedia, MessengerPeople and Pathwire have closed, and the directed share issue referenced above is completed, the number of outstanding shares in Sinch will increase by 130.2 million. All else equal, this implies that the number of shares in Sinch rises to 830.1 million, which is an increase of around 14 percent.

Financial impact of recent transactions

In Q2 2021, Sinch reported revenues for the last 12 months of SEK 11,809 million, Gross profit of SEK 2,966 million, and Adjusted EBITDA of SEK 1,165 million. This corresponds to a gross margin of 25 percent and an Adjusted EBITDA margin of 10 percent.

Pro forma financials include 12 months of earnings from all entities that have been acquired during the past year, as well as from Inteliquent, MessageMedia, MessengerPeople and Pathwire (which have been announced but not yet closed). On this pro forma basis, Sinch’s revenues for the last 12 months, as of Q2 2021, would have been approximately SEK 20.4 billion. Gross profit would have been approximately SEK 7.2 billion and Adjusted EBITDA approximately SEK 3.2 billion. This corresponds to a gross margin of 35 percent and an Adjusted EBITDA margin of 16 percent.

Regulatory approval

Closing of the transaction is subject to customary closing conditions, including merger-control filing to the Federal Trade Commission and the Department of Justice in the US.

Timeline

The transaction is expected to close by the end of 2021.

Advisors

Moelis & Company UK LLP is acting as financial advisor to Sinch in the transaction, with K&L Gates LLP acting as legal advisor. Morgan Stanley & Co. LLC is acting as financial advisor to Pathwire, with Goodwin Procter LLP acting as legal advisor.

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