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EY valued NSO Group at $2.3bn months before emergency bailout

EY, the Big Four accounting firm, has valued secretive Israeli spyware firm NSO Group at $2.3 billion just months before it needed emergency crisis funding cash and its own funds are deemed worthless.

EY’s valuation, more than double that of NSO two years earlier, was made by analysts at the firm’s Luxembourg office in July last year, according to documents seen by the Financial Times. The estimate of NSO’s enterprise value was made without visiting the company or verifying the information provided to its analysts.

By contrast, Berkeley Research Group, an advisory firm that represents NSO’s private equity owners, said earlier this year that the company’s capital was “worthless.”

EY’s valuation was also well above what an anonymous potential buyer had offered a few weeks earlier, when it offered to take a minority stake in a deal valuing NSO at $1.6 billion, including $500 million. dollars of debt. This figure was presented to NSO investors at a meeting in July 2021, according to a separate document seen by the FT, although the deal did not go through.

EY’s assessment came as reports of the misuse of NSO’s Pegasus cyber weapon against activists and journalists ricocheted around the world. Around the same time, NSO’s private equity owner was torn apart by infighting, while the spyware maker was sued by Meta, Facebook’s parent group, for hacking into its messaging platform. WhatsApp secure.

Investment bankers and defense officials are now trying to reassess the company’s value, amid a potential deal to divest NSO’s key assets to US defense contractor L3Harris . This sale is designed to circumvent a US Department of Commerce blacklist in November 2021, which further damaged the company’s reputation and operations.

In a 132-page report that valued NSO and other companies owned by private equity group Novalpina Capital, EY described NSO as a “market leader” even though its revenue fell 17% in 2020 as its competitors had experienced healthy growth.

Months later, the Berkeley Research Group, which was tricked into liquidating the private equity fund, came to the conclusion that the capital of NSO – once the crown jewel of Israel’s surveillance export industry – was worth zero. .

In October 2021, BRG would provide a $10 million emergency loan to an NSO sister company to help with payroll.

EY and NSO declined to comment for this article.

While it’s not uncommon for private valuations of tech companies to swing between valuation cycles and between acquisitions, the process by which these numbers are assigned — in behind-the-scenes deals often signed by large service companies professional but not publicly available — comes under scrutiny as valuations of listed companies fall.

EY’s report comes at a pivotal moment. It was officially commissioned just two days before an international newspaper consortium drew attention to how NSO customers, including Saudi Arabia, the United Arab Emirates and other authoritarian countries, used Pegasus to surreptitiously break through the encryption of phones and turn them into surveillance devices.

By August 6, when EY signed off on the assessment, the company had been in the headlines for weeks and new sales had begun to decline.

Still, EY said it only assessed the company as of June 30, without assessing the impact of “increased negative media attention” after that date. Even though this attention forced the company’s chief executive to publicly commit to reforms, EY decided that measuring its impact was beyond its purview, choosing to ignore any “social or governance” issues. “.

In November, NSO was added to a US trade blacklist, another blow to its operations. In December, a group of NSO creditors said in a letter to its majority shareholders that the company was insolvent.

Fluctuations in NSO’s value estimates are also unique to the company, which has operated in the shadow of Israel’s military and diplomatic relations with Arab and Gulf neighbors, while trying to attract the bounties that investors were willing, until recently, to pay. for technology companies based in Israel.

Because it straddled the classified world of espionage and the limited disclosures of a private equity-backed cyber-weapons maker, ONS officials went on debt roadshows. Chief executive Shalev Hulio told friends that the company’s peers include publicly traded surveillance giants such as Palantir and Verint, while protecting crucial operational and financial information behind nondisclosure agreements.

Moody’s has tracked the NSO’s $500 million debt since its issuance in 2019, but said this month it was withdrawing its rating due to “inadequate” information.

At EY, the valuation came with a disclaimer – their complicated financial modeling was just a “desktop valuation”, which meant she hadn’t visited the company. EY said it “relyed on the accuracy and completeness of the underlying information provided to us” and did not verify or verify it.

Even office valuations can have significant implications, especially since they indicate how much NSO managers could expect to receive in incentive payments – worth a total of $54.3 million if targets were met. , according to the EY report.

EY’s assessment portrayed NSO as a thriving tech company, with revenue expected to jump around 60% by 2023 to $400 million, with sustained media attention over the abuse of its spyware Pegasus having little to no impact on future sales. A counter-drone and data-analytics business would complement Pegasus sales.

This differs sharply from the view of executives at the Berkeley Research Group, which was brought in by Novalpina’s original investors – including Yorkshire and Oregon pension funds – and now oversees the fund.

BRG argued, according to correspondence seen by the FT, that NSO’s business could only continue by selling to “high risk customers” – deals which BRG refused to approve.