With a headline value of just under $2.2b, investors awoke to news on Monday morning that accounting software provider MYOB Group Limited (MYO.ASX) had yet again attracted the interests of a private equity group; KKR & Co had submitted an initial non-binding proposal at $3.70 per share having lightened Bain of 17.6% of the register. This marks the second time this decade MYO has been the subject of corporate activity, Bain emerging winner back in 2011 over both private equity and corporate interests in KKR & Co, Hellman and Friedman, and Sage Group.
With no offence to anyone at KKR or the rest of the PE industry, we remain cautious, even sceptical of non-binding, indicative private equity offers, or the private equity put’ as we call it. Similar to our commentary last year on the private equity interest in Fairfax Media (here), or our most recent commentary on Universal Coal (here), we remain advocates that a successful merger arb strategy is one that treats non-binding proposals with due caution - the recent failed BWX transaction is a great example of what can go wrong with non-binding private equity proposals. A non-binding approach is highly favourable to the private equity bidder and less so existing shareholders.
Having said that, this situation is slightly unique in that another PE firm happens to be the selling shareholder who is helping to facilitate the bid and so too because KKR have already outlaid a significant amount of cash in agreeing to purchase 17.6% from Bain. Furthermore, KKR did look at MYOB back in 2011 and would presumably be more than familiar with the company’s operations, implying a reduced risk that due diligence might uncover something unexpected. On balance, we think it’s likely that KKR proceed to make a binding offer but it’s far from assured.
Bain’s successful acquisition of the company back in 2011 for an estimated $1.2b implied a valuation multiple of 11.3x EV/EBITDA. KKR’s $3.70 per share puts the deal around 13.9x EV/EBITDA, which presents as an attractive price above comparable transactions (historically in the 11-13x range). We would stop short of calling it a knockout bid but it is a significant premium to the recent trading price for a business up against some pretty stiff competition, best reflected by some mixed 1H18 results showing a bump in revenues offset by falling profits as it pushes to claw back market share. As a point of interest, MYO floated at 16x forward EV/EBITDA.
So, given the contested tussle back in 2011, can we expect others to circle?
The 11th hour offer for Sirtex Medical that is still fresh in investor’s minds is testament to why we never rule out competing proposals, however we are a little more circumspect when it comes to MYOB. Bain have long been earmarked as willing sellers, which has garnered significant short interest in the shares. With this knowledge in mind, Bain have likely canvassed for offers prior to the decision to sell such a significant chunk of the register to KKR, and at a clearing price of only $3.15 against the headline price of $3.70, they have certainly left a lot on the table to help get this offer off the ground. The most recent Bain sell down occurred in February this year at $3.55 for a 17% stake, and it is those hedge funds that bought there and/or lower that open the door to the possibility that KKR might sweeten its offer to get the transaction across the line. How shareholders react to a $3.70 price tag is now key.
Our assumed low chance of a counterbidder and the non-binding nature of the proposal lead us to think that the shares are trading at approximately fair value or perhaps slightly above it. Today’s announcement is likely to have triggered some short covering which, in itself may be distorting the market’s pricing of ‘fair value’ in this instance. All else being equal, we’d expect to see the shares trade slightly lower in the days ahead. Whilst we’re not exactly sold on Monday’s close of $3.55, a share price that was $0.05-$0.10 lower would be somewhat more compelling and in our opinion, would represent a better risk/reward proposition.