Today in Chanticleer in the afr :
"How big French group made the most of cyber company’s ASX woes
Tesserent boss Kurt Hansen said there was an inevitability about its take-private given the way its shares had traded and the bumpy ride at the smaller end of the market.
Hot sector: Tick. Recurring revenue: Tick. Double-digit revenue and earnings growth: Tick. Good time as a listed company on the ASX? Hardly.That’s the surprising story behind cybersecurity outfit Tesserent, the biggest listed cyber group in Australia, which has called time on its seven-year stint on the ASX boards.
Box Hill-based Tesserent couldn’t make it work. In management’s eyes, it hit every milestone since listing, had grown strongly by focusing on its people and clients and built one of only a handful of players of scale in a new and booming industry, but it just couldn’t grab and hold investor attention long enough to make money for its backers.Perhaps it was too small – it was tracking towards about $200 million revenue and $15 million EBITDA for the 2023 financial year – or didn’t play the investor relations game the right way.It was covered only by stockbrokers Shaw and Partners and Curran & Co, and coverage was patchy at best. The last time a sell-side broker valued the company was in October, according to Bloomberg data. Its shares closed at 4.9¢ each last week, having started the year at 13¢.
So bumbling along with a $66 million market capitalisation, and with its shares at a three-year low despite growing demand for its cybersecurity services and its financial performance headed in the right direction, the board agreed to a $232 million takeover by French-owned defence bigwig Thales.Thales bid 13¢ a share or close to three times Tesserent’s last traded price of 4.9¢; an offer too good to refuse.Goodbye ASX.Tesserent boss Kurt Hansen, a seasoned IT industry executive, said there was an inevitability about its take-private given the way its shares had traded and the bumpy ride at the smaller end of the market.“You are a bit on the hamster wheel to a certain extent with the announcements and transparency,” Hansen says, reflecting on his time running a publicly traded company and Tesserent’s inability to attract institutional investors.“Anything under $25 million EBITDA, I’ve been told, makes it hard to get institutions. And some don’t like what they call a roll up, even though we’ve told them many times that we’re integrating the capabilities of our acquisitions.“I don’t know... maybe they like to be talked to a lot and we didn’t.”But he’s looking forward to running a company and dealing with one shareholder, the €27 billion Thales, rather than the 11,000 or so currently on Tesserent’s share register.All that stands in the way is a Tesserent shareholder vote – and the deal was launched with pre-commitments from Tesserent’s board, which owns 9 per cent of shares on issue – and Foreign Investment Review Board approval. Thales Australia is already a big player in Australia’s defence industry and does not anticipate any troubles obtaining regulatory approval.
The situation is indicative of what’s playing out at the smaller end of the ASX. Plenty of microcaps feel like they cannot get the investor attention required to make a listing worthwhile, and become easy prey for a deep-pocketed strategic suitor. On Friday, for example, American WebMD paid a 325 per cent premium for software company Limeade.
Thales Australia boss Jeff Connolly, a former Siemens executive, justifies the 165.3 per cent purchase premium by pointing to the growth he expects from Tesserent when it is part of the larger French-owned company.He says Thales is big in cybersecurity (about $2.5 billion in annual sales) and it was a logical bolt-on for its Australian arm.In particular, he reckons Tesserent can benefit from Thales Australia’s access to the Australian Defence Force and Department of Home Affairs, and pick more defence and border security-related work.Project ApolloThales mapped out Australia’s cybersecurity consultancy landscape and quickly realised there were only a handful of players of scale. Tesserent is arguably the No.2 player, trailing only private equity-backed CyberCX. Both Tesserent and CyberCX have been busy acquirers – Tesserent, for example, completed 13 acquisitions in the past few years – although had experienced some growing pains, Connolly said.So Thales could make the most of Tesserent’s poor trading on the ASX and buy it, or try to build a business with similar scale. Connolly said it would be hard to get access to 500 cyber consultants any other way, given skills shortages in the new sector.It was a “relatively rapid” courtship; Thales only started working on Project Apollo, the acquisition, this year.The big French contractor is no stranger to Australian M&A. It acquired Australian Defence Industries or ADI from Transfield Holdings in 2006 to become Australia’s biggest defence manufacturer. It now operates across 35 sites in Australia, making things like Bushmaster troop carriers and firearms for the Australian Army at Lithgow in NSW.It’s also been active acquiring cyber businesses offshore, including S21sec, Excellium and OneWelcome in Europe in 2022.The two sides expect the deal to complete in October. Tesserent’s shares rocketed towards the bid price on Tuesday, as hedge funds bet on the transaction proceeding as proposed.Hansen says Thales has been through his company’s strategic plan as part of the due diligence, and endorsed it. Tesserent will continue to operate under its own name and management team, he says, and report into Thales Australia.Thales Australia has 3800 staff in Australia and will add another 500 from Tesserent.At $232 million on an enterprise value basis, the deal would value Tesserent at 1 to 1.5 times financial year ’23 sales. The S&P/ASX 300 Info Tech index trades at 4.5-times forward sales, according to data from ASX."All DYOR
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