Calgary-based Blackline Safety chief executive officer Cody Slater holds one of the company’s monitors in June, 2022.Glenn Lowson/The Globe and Mail
Blackline Safety Corp. BLN-T is facing resistance to its privatization plans over claims that company insiders and large investors will benefit far more than minority shareholders.
The Calgary-based maker of worker safety monitoring equipment – its G7 wearable gas detection unit is used by more than 3,000 companies globally – agreed earlier this month to a takeover offer from U.S. private equity giant Francisco Partners Management LP for up to $850-million. If the deal is approved by shareholders at a special meeting in June, Blackline will join a growing list of Toronto Stock Exchange-listed companies abandoning public markets.
Blackline’s largest shareholders – the biggest being Edmonton Oilers owner Daryl Katz, with a 25-per-cent stake owned through his investment firm DAK Capital Inc. – already support the deal. Mr. Katz, Blackline chief executive officer Cody Slater and other members of the management team and board of directors holding a combined 31 per cent of the company will get to roll over their shares as part of the deal, meaning they do not have to relinquish their equity in the business.
The rollover shareholders other than Mr. Slater are also kicking in $45-million to fund part of their transaction, leaving them with larger stakes in Blackline once the deal closes.
That, according to Robert Poiner, makes it clear the takeover proposal is designed to cut Blackline’s minority shareholders loose while insiders and larger investors get to keep riding what is expected to be a high-growth period for Blackline. Mr. Poiner is the founding partner of Edgeworth Capital, an investment fund based in Connecticut that owns roughly 3 per cent of Blackline, and he plans to vote against the deal at the shareholder meeting on June 15.
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“We don’t even really need to talk about the numbers,” Mr. Poiner said. “The clearest signal that this undervalues Blackline is the behaviour of the insiders. They are not selling. These guys are telling us that it is good value while writing a check to increase their exposure.”
The timing of the deal, he argues, is especially suspect, coming less than one month after Blackline launched its new flagship G8 product. On a March 12 conference call with analysts, Mr. Slater called the G8 “the most significant product platform in our history” that would allow Blackline to pivot to “a fundamentally different and superior business model.”
Research and development costs associated with the G8 kept Blackline in the red for the better part of the last decade, Mr. Poiner said, with the Francisco Partners offer arriving just as shareholders were about to be rewarded for their patience.
“After eight years of funding these losses, Blackline has finally arrived at this inflection point and it is precisely at this moment, no surprise, that a private equity fund from San Francisco is jumping in to take Blackline private,” Mr. Poiner said.
The structure of the deal itself suggests the buyer is well aware of the potential for rapid growth. Francisco Partners is offering $9 per share in cash, with the possibility of another 50 cents per share if Blackline’s annual recurring revenue, or ARR, hits $148.9-million by the end of October, 2027. That would represent a 65-per-cent jump from the $90.5-million in ARR the company was earning as of its latest quarter, which ended on Jan. 31.
“That is pretty revealing in itself and confirms what they expect this business to do, which is a massive expansion on the back on this new G8 product,” Mr. Poiner said. “Private equity has done this clever structure where we get almost none of the upside despite funding the G8 investment for almost a decade.”
Jason Zandberg, Blackline’s director of investor relations, said via e-mail that “the response we have had from shareholders has reflected support of the proposed transaction.”
Blackline Safety to be taken private by Francisco Partners for up to $850-million
Mr. Poiner is not the only one unconvinced. Another large minority shareholder in Blackline that owns roughly 1.1 per cent of the company said they have not made a voting decision yet because there is the potential for a higher bid to emerge. The Globe and Mail has agreed not to identify the investor because they are not authorized to disclose internal deliberations.
Shortly after the Francisco Partners deal was announced, ATB Cormark Capital Markets analyst Martin Toner said in an April 9 note to clients that a competitive bid, “while unlikely, is possible.” He referred specifically to MSA Safety Inc., which produces a wider array of workplace safety products and trades on the New York Stock Exchange with a US$6.7-billion market capitalization, as a possible white knight.
“It has long been believed that other players in the gas detection market would be interested in Blackline’s competitive lead,” Mr. Toner wrote. “Conglomerates that value durable, growing cash flows would also have an interest in Blackline.”
Mr. Toner also took the unusual step of maintaining his buy rating and $11-per-share price target on Blackline stock after the deal was announced. The common practice for analysts covering a company that has agreed to be acquired is to assign a “hold” rating and a price target that is roughly equivalent to the takeover price.
Mr. Toner chose to defer taking that step “until we have more confidence in the deal being approved by shareholders and given the chance of a competing bid,” he wrote.
Blackline obtained a formal valuation from CIBC Capital Markets that concluded the fair value of the company’s shares as of April 7 was in the range of $8.15 and $11.10 per share. The midpoint of that range is $9.63 per share, slightly higher than the total potential $9.50 per share that Francisco Partners is offering. The stock closed at $8.88 on Friday.
The practice of insiders and large investors rolling over their shares when a public company is taken private has caused issues in prior transactions. In 2024, Toronto-based tech company Q4 Inc. drew the ire of one of its largest shareholders for accepting a $257-million buyout from a private equity firm in Silicon Valley that allowed several Q4 insiders to roll over their shares.
The Q4 deal was ultimately approved with more than 81 per cent support, though Mr. Poiner is hoping the circumstances around Francisco Partners’ offer for Blackline will generate broader shareholder resistance.
“The whole structure, we think, is built to take advantage of minority shareholders,” he said.