I think there is very little to celebrate here.; there is a lot of value being foregone by this proposal.
Merely a small variance in sentiment regarding the likelihood of the M&A cycle returning - such sentiment turn couldn't be too far off - would have delivered today's share price before long anyway, in my view.
And then one needs to consider the longer-term structural growth issues:
Management points to ARR of $100m. Conservatively, even if the cost base will be allowed to flex upwards quite generously, FCF >$20m pa is easily conceivable an a standalone basis, and probably closer to $25m after synergies in the hands of a new corporate owner.
So the $200m acquisition consideration EV implies a prospective FCF acquisition multiple of just 8x.
This is a business that has developed some quite unique and differentiated intellectual capital, which has high value-in-use and which is mission-critical to its client base, so pricing power is meaningful.
Moreover, it has a granular client base and multiple potential revenue streams yet to be developed (in other words, there is significant embedded optionality, for which the acquirer is not paying, in my view.)
And then there's the "carve-out" element, which is never a good look if all shareholders aren't also offered opportunity of continued participation in the business being carved out.
And then in a few months time shareholders will need to cut a large cheque in favour of the ATO, which they otherwise would not have had to do.
So, for number of reasons, this takeover sucks.
In the light of all of the above, I think that 12x EV/FCF is an appropriate multiple.
That equates to an Enterprise Value closer to $300m, or $3.50/share.
Shareholders are being short-changed here, and I'll be making that representation to the company Chairman and the other independent directors.
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