Ann: RKN: Reckon and Novatti - Payment Solutions, page-63

By any measuring standard, to sell your businesses for its full valuation while retaining its core assets sounds too good to be true. But that’s exactly the deal that Reckon (ASX: RKN) has pulled off with the divestment of a periphery business for $100m when Reckon was trading on the ASX with market cap of $99m.

The sale is for Reckon’s Accountants Practice Management Group which is a subsidiary business within Reckon that provides office management software to accounting practices. It is entirely independent of Reckon’s cloud-based accounting software for which the Company is best known for, which has more than 114,000 users.

What makes the transaction so remarkable is the fact the buyers – The Access Group – have effectively purchased just a minor asset within Reckon’s business portfolio for the full valuation of the Company.

The all-cash purchase price of the minor business represents a 4.6x multiple of FY21 revenue and 8.4x multiple of FY21 EBITDA. By divesting it, Reckon will concentrate on their low-cost alternative cloud based accounting software which has been hugely popular amongst small business owners for its simplicity, accessibility and full suite of business services available through the Reckon marketplace.

“This transaction would allow us to focus on our remaining business divisions,” said Reckon CEO, Sam Allert.

“We plan to build on our 114,000 cloud users, to expand our suite of accounting and payroll cloud solutions and continue to help small businesses turn ambition into accomplishment, as well as pursue our practice management opportunities in the global legal market.”

Following the sale of the accounting practice management business, Reckon will comprise the Business Group and the Legal Practice Management Group, which together generated ~$50 million of revenue and EBITDA of ~$17 million in FY2021. That represented ~70% and ~60% of Reckon’s pre-Transaction revenue and EBITDA respectively.

The biggest winner of the transaction are Reckon’s shareholders which will be paid a special dividend once the divestment is settled, subject to regulatory approval. Reckon has committed to returning the majority of sale proceeds to shareholders, but like its previous asset sale, will also utilise proceeds to clear some debt off their balance sheet.

As of 31 December 2021, Reckon had $15.2m in current liabilities and $24.8m in non-current liabilities.

Full details of the special dividend payment are still to be confirmed but if $70m of those proceeds are distributed to shareholders, the biggest winner would be Reckon’s largest shareholder which only entered the share registry in July 2021.

Fellow listed company Novatti Group (ASX: NOV) holds 19.88% of RKN shares as a fintech company specialising in digital payments technology but only acquired that strategic stake last year for approximately $22 million.

Since then, Novatti and Reckon have entered into a working relationship where Novatti provides Reckon’s 114,000 software users with merchant services, enabling them to accept online payments from Visa or Mastercard with Novatti and Reckon splitting profits generated from merchant fees.

By acquiring the strategic stake, Novatti secured exposure to those 114,000 prospective customers, and has already enjoyed more than $1.1m in fully franked dividends.

With the special dividend from the sale proceeds coming their way, Novatti effectively acquired their 19.88% strategic stake in Reckon for a nominal amount in what now looks a stroke of genius by Novatti CEO Peter Cook.

As for the Sale of the Century, Reckon’s deal isn’t quite as jaw-dropping as Afterpay’s $39 billion sale to Block as the business that continues to haemorrhage money. However, it’s right up there considering Reckon has effectively sold it’s business at full price while retaining the most valuable assets.