Deal in focus: Apax’s Sophos joins rare group of UK unicorns

The IPO meant the company has joined a select group of so-called 'unicorns' - start-ups that have reached a valuation of $1bn or more.

The company raised £80m in the IPO, with shares priced at 225 pence each. At the time of writing, the share price had increased to 241p per share. The free float comprised 450,000,000 shares.

Following the listing, Apax has retained a 40.1% stake in the company. It previously held 63.8% of the shares in Sophos through the GP's Apax Europe VII and VI funds, as well as Apax US VII. Investcorp's stake was reduced from 4% before the IPO to 2.5% following the flotation.

Oxfordshire-headquartered Sophos provides IT security systems and software, including anti-virus software.

Founded by Jan Hruska and Peter Lammer in 1985, the company posted revenues of $446.7m in the year ending in March 2015, compared to $378.8m and $361.6m in the two years prior, and a 2015 adjusted EBITDA of $101.4m. The business employs 2,000 people.

The exit comes five years after Apax acquired a 70% stake in Sophos for £546m in a secondary buyout from TA Associates. According to Salim Nathoo, a partner at Apax and non-executive director at Sophos, the decision to purchase the company was based on several attractive features. "Firstly, we saw that security software was an attractive market," he says. "We recognised there were increasing threats online and we saw the expediential growth of those attacks, meaning that the cybersecurity market was set for significant growth.

"Second, the company needed to be scaled to compete in this area and Sophos was one of the few scale companies in the space. The number of attacks were becoming so high it was clear you needed deep technology and security experience, global presence and the scale to invest in product development, which act as high barriers to entry. Furthermore, we saw the opportunity to use the company as a platform for M&A to widen its product offerings," continues Nathoo.

SME suitability
Apax also found Sophos's focus on the mid-market to be a key attraction. "Lots of other companies in the space were focused on large corporates or consumers," Nathoo says. "But Sophos's product is aimed at SMEs – it is easy to install, easy to use and has low total cost of ownership while providing very strong protection."

After acquiring the company, Apax's main investment objectives were to scale up the business through acquisitions and further optimise the company. In 2011, the GP supported management in acquiring German network security business Astaro. "At the time, Astaro operated primarily in Germany and in a different segment of cybersecurity to Sophos's traditional end-point business," says Nathoo. "The big question was whether Sophos could expand the business outside Germany. It was a bold bet."

This deal exposed Sophos to network security, which is a faster-growing part of the cybersecurity market. This was followed in 2014 by the acquisition of a Indian network security company Cyberoam. "Sophos is now working on exploiting synergies between network security and end-point security to provide even better protection for customers," Nathoo adds.

Sophos's management team was entirely revamped under Apax's ownership. A new CEO, Kris Hagerman, joined the company in 2012; he was previously CEO at Corel Corporation. After joining, Hagerman recruited an entirely new management team. "Kris and his team had the required expertise to develop a compelling technology roadmap, expand the channel through which Sophos sells its products, and drive further international expansion, particularly in the US," says Nathoo.

Last year, Apax began thinking about exiting the company. "Around nine months ago we knew we had something really strong; great management, great products and good growth, so we were in a position to think about an exit. We considered all options including trade, another financial sponsor and IPO. We did receive inbound interest but in the end decided a float would provide best value and would be best for the company," concludes Nathoo.

People
Apax – Roy Mackenzie, Salim Nathoo
Sophos – Kris Hagerman.

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