Spruce Point says Forescout Technologies may have violated sale covenants

BOSTON (Reuters) - Cybersecurity company Forescout Technologies FSCT.O may have violated conditions of its sale agreement to private equity firm Advent International Corp when it restructured and drew on its credit line, research firm Spruce Point Capital told the potential buyer on Tuesday.

Forescout’s first-quarter earnings report disclosed a restructuring and drawdown of a revolving line of credit, Spruce Point’s managing partner Ben Axler wrote to Bryan Taylor, head of Advent’s technology investment team. “Both (of) which may violate a deal covenant (and) provide stronger justification for renegotiating or terminating the deal,” Axler said.

Reuters saw a copy of the letter sent to Taylor on Tuesday.

Representatives for Advent and Forescout declined to comment.

Advent announced plans to buy Forescout in a deal initially valued at $1.9 billion in early February. The deal is scheduled to close next week.

Axler, whose firm specializes in forensic research that uncovers companies’ vulnerabilities and often bets their stock price will fall, has been pushing Advent for weeks to renegotiate or walk away completely.

Spruce Point is short Forescout’s stock and would benefit from a drop in its share price, Axler said in the letter to Taylor.

Forescout’s stock price dropped 4.95% on Tuesday to close at $30.50 a share. The share price is off 2.16% this year.

The company on Monday blamed its shrinking revenue on the coronavirus outbreak and worries about the impending sale to Advent. Axler said the pandemic had an effect on the U.S. economy only in early March and that half of Forescout’s revenue “is tied to (relatively new) subscriptions and is recurring,” making it unlikely that the virus hurt revenue so severely.

“If Forescout’s financial outlook was as promising as indicated by the optimistic projections shared during the diligence process, why did the Company announce a restructuring in Quarter 1 2020, and draw down $16 million on its credit facility while maintaining $98 million of cash and equivalents at year end – enough to bridge its gap to expected Quarter 2 2020 closing,” the letter said.

The coronavirus has hit dealmaking hard this year. Mergers and acquisitions already got off to their slowest start this year since 2012.

Reporting by Svea Herbst-Bayliss; Editing by Cynthia Osterman