Why the private equity bid for MYOB just might succeed: Bartholomeusz

Private equity is back! Whether the Archer Capital and HarbourVest bid for MYOB is a sign of things to come or an aberration is, however, impossible to tell at this point.

Private equity is back! Whether the Archer Capital and HarbourVest bid for MYOB is a sign of things to come or an aberration is, however, impossible to tell at this point.

Certainly, if the private equity firms could succeed in acquiring MYOB at their bid price of $1.15 a share, rising to $1.25 a share if they achieve full ownership, they’d be well-pleased. Earlier this year Archer made a tentative and highly conditional approach at $1.90 a share that was soundly rejected by the MYOB board.

Even though MYOB subsequently returned $80 million or 20.8 cents a share in capital to shareholders, the base offer represents a very, very skinny premium to the levels around $1.10 a share at which MYOB shares have traded over the past month.

Despite that, and despite MYOB shareholders meeting next week to approve, among other things, another $50 million (12.9 cents a share) return of capital, the private equity firms have attracted some support. Guinness Peat Group, with about 13.6%, Colonial (just under 10%) and Octavian (about 2%) have, the bidders say, indicated they will support the bid.

Schroders, with just under 10%, has apparently indicated it would accept at the $1.25 a share level. That’s fairly meaningless given that, if the 10c a share up-lift in the offer came into play, it would mean the takeover was all but over.

It perhaps isn’t surprising that the institutions are supporting Archer and HarbourVest. They and GPG in particular, were most unhappy that the MYOB board didn’t fully engage with Archer earlier this year. The board took the view that the offer undervalued their business and that, if they were prepared to put it up for sale, there were more natural buyers that ought to be prepared to pay more for it than private equity.

The shareholders gained a measure of revenge when they narrowly voted down a proposed issue of options to MYOB’s former managing director, Craig Winkler, in April. They presumably are still angry that MYOB denied them a shot at the $1.90 a share offer earlier in the year – although had that been reinvested in the market it would be worth considerably less than that today.

This time MYOB did allow the private equity firms due diligence but was rewarded with what looks like a low-ball offer that is, as is common with private equity plays, studded with conditions.

If one assumes the MYOB shareholders are acting commercially, the institutions’ willingness to back a $1.15 a share offer signals how nervous and desperate for cash institutions are in the volatile environment. Archer and HarbourVest, by making the bid – and thereby showing a willingness to deploy cash in this environment – may, conversely, be demonstrating a conviction that the market is near a bottom.

Or maybe not. MYOB is a company that throws off a lot of cash flow very consistently. It has recently reaffirmed guidance of around 9% to 11% growth in earnings before interest, tax, depreciation and amortisation for the year to December.

Buying it at depressed prices in a frightened market doesn’t appear a particularly high-risk strategy. There is a lot of cash sitting in private equity and hedge funds waiting for bargains to emerge. Almost by definition a cash takeover bid in the current environment will only be made by a bidder that believes its target has been badly over-sold.

The bidders have a 50.1% minimum acceptance condition but the offer is also conditional on a board recommendation.

One would expect that the current base offer would struggle to gain a recommendation unless Winkler, a co-founder of MYOB who owns about 28% of the group, decides he wants to cash out. They may struggle to get to 50.1% without a recommendation, particularly given that another return of capital is imminent.

MYOB’s board – headed by the Takeovers Panel president and Macquarie Bank executive Simon McKeon – has options. It could recommend the offer, try to stare it down, or put the group up for auction in the hope of flushing out one of those trade buyers they were referring to when they rejected Archer’s overtures earlier this year.

There is a fair way to go before the fate of MYOB is resolved.

This article first appeared on Business Spectator

 

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