Early on June 22nd, EROAD (NZX: ERD) notified the market that it had received a non-binding indicative offer (NBIO) from Toronto-listed Constellation Software (via Australian-based Volaris Group) for the entire company at a value of $1.30 per share. That represents a significant premium to the closing price of prior days trading of $0.77, but does not seem to fully recognise the company’s potential. Will this result in yet another scheme of arrangement-based ‘exit’ from public markets for a New Zealand technology company? Or could there be scope for a different type of ‘partnership’ approach, that shares risk with existing investors and utilises the little-used Takeovers Code?
The NBIO for EROAD follows a prolonged period of technology-based companies being removed from New Zealand ownership – both on the NZX and from private ownership. The offer for EROAD follows on from the recent de-listing of Pushpay Holdings after a successful $1bn takeover via scheme of arrangement earlier this year and the 2021 purchase of Christchurch-based private outfit Seequent for $1.45bn by Bentley Systems.
There are plenty of other examples. A 2021 Spinoff article highlighted three other key transactions (besides Seequent) that year alone (Vend, Timely and Ninja Kiwi).
NZSA’s focus on wider ownership models is relevant. A public listing is a consideration for existing private owners as a means of unlocking their ownership value and raising capital to support future growth. In recent years, we’ve seen an increasing trend towards both private equity and ‘trade sales’ – often by global investors. In addition to the benefits normally associated with public markets, this may also provide a synergy for the target business by offering additional capability – be it people expertise, access to markets or some other form of value chain benefit can arise when an industry-experienced ‘cornerstone’ shareholder joins the register.
And so it is with publicly-listed EROAD. In a recent investor presentation, the company highlighted a desire to “identify partnership opportunities to assist EROAD in accelerating the North American Strategy.”
Investment and Capability
Arguably, EROAD’s ability to secure future investment from its predominantly New Zealand-based shareholders is unlikely to feature as a significant hurdle, although there is a degree of risk in that statement.
Analyst forecasts (and the company) seem to believe that the significant hurdles of the past two years have been overcome, following the purchase of US-based Coretex and the departure of CEO (and founder) Steve Newman. It’s all about ‘jam tomorrow’, with positive cashflow forecast in FY25 coming just in time to fend off the company’s cash burn rate and avoid the need to raise more capital. Clearly, that feels tight – and puts the focus squarely in EROAD’s Board and CEO Mark Heine to deliver the cost reductions and revenue growth required to support that, all while undertaking the required investment to develop the company’s business model.
More telling is the company’s focus on developing partnerships to support its North American customer expansion. It’s possible to speculate that it’s the search for “partners” (advised by that well-known partnership development agency, Goldman Sachs) that highlighted EROAD to Constellation in the first place.
There are some distinguishing features between Pushpay Holdings, de-listed earlier this year following a successful takeover, and companies like EROAD and Seequent. Both of the latter are ‘multi-national’ companies – or, to use EROAD’s preferred language “multi-domestic”. Seequent operates in 18 countries, with a strong Christchurch base of 170 people and approximately 250 staff elsewhere in the world. EROAD operates in NZ, Australia and the US, with around half its units in New Zealand, 40% in the US and a growing presence in Australia.
Pushpay, on the other hand, operates almost exclusively in the US, with predominantly US-based staff. A predominance of US-based cashflows make it more likely that Pushpay should have greater appeal to a US-based investor, removing any currency translation risk from the equation.
So, from an investment perspective, the argument for a ‘natural owner’ based on geography is less compelling.
But let’s get back to that key word – partnership.
It’s only relatively recently (2021) that investors poured capital into EROAD, at the heady price of $5.58 per share, to fund the North American Coretex acquisition. This was seen as a ‘gamechanger’ by the Board at the time, with the acquisition and subsequent capital raise well-supported by shareholders. In the long-term, achieving the full value from the Coretex purchase highlighted in the independent valuation report may still be likely. Among other things, the steep share price decline since is likely to reflect an element of corporate indigestion following Coretex, a change investor sentiment following the departure of Steve Newman, the more recent impacts of general investor sentiment towards early-stage companies, current debt levels and greater-than-expected cash investment as the company transitions to an upgraded, 4G-based technology platform. Industry feedback indicates it offers a good product, offering value to customers.
The company’s plan is clear – get through a bit of short-term pain (investment, costs, debt reduction), find the right partner to secure market access and underpin growth, and shareholders will see some long-awaited upside to their investment.
Constellation Software is a long-term investor in specific technology businesses, maintaining a “house” of software solutions focused on specific markets. With a market capitalisation of CAD$56 billion (around NZ$69 billion) and a share price that has risen by 2.5x over the last 5 years, it’s a touch larger than EROAD. Their NBIO for EROAD values the company at NZ$147m. Constellation owns a number of other businesses in Australia and New Zealand.
Bearing in mind those factors, there may be some potential for a different outcome to the standard “Scheme of Arrangement” approach so beloved of bidders in recent years.
Could a partial takeover secure the best outcome for all parties?
Constellation has been even-handed in its announcements, relating to any future approach being conducted under the Takeovers Code or a Scheme of Arrangement. That in itself is interesting; perhaps they are simply unaware of the prevailing bias of bidders in NZ to treat a Scheme of Arrangement as a ‘fait accompli’ for a takeover methodology.
AT NZSA, we’ve long advocated for a review of the Takeovers Code to remove the barriers for issuers associated with its implementation. In particular, the threshold of 90% is seen as difficult to achieve as compared with the threshold required under a Scheme offer.
One advantage of the Takeovers Code, however, is the ability to effect a partial takeover offer. For both EROAD and Constellation, such an outcome has advantages. EROAD would gain a ‘cornerstone’ investor and some support in accessing new geographic markets. There would also be no risk of a sudden ‘dislocation’ in its existing underpinning capabilities, both in NZ or the US. The company is likely to be able to leverage Constellation’s own capabilities, as with any strong partnership.
For its part, Constellation still gains exposure to a market it clearly wants to invest in – but is spreading its risk with existing investors. It also provides a ready valuation and a ‘liquid market’ for any future realisation or further capital raise.
For long-term holders of EROAD, an offer of $1.30 a share could be seen as a way out from what is likely to have been a poor investment over the years. Nonetheless, for shareholders with a longer-term horizon, there is still plenty of water to run under the bridge. There’s a strong argument to suggest that the NZ business alone justifies the offer price, let alone the potentiality from EROAD’s US operations. A partial takeover outcome supported by an effective governance structure may just be the optimal outcome for all.
And for all those other companies who see a ‘trade sale’ as the only way of accessing new capabilities or growth – don’t forget about our public markets and the lesser-travelled route associated with partial takeovers.
Oliver is the Chief Executive of NZSA. He owns a small number of EROAD shares. NZSA continues to advocate for a review of the settings associated with the Takeovers Code and their relationship to takeovers effected under a Scheme of Arrangement. Our policy and advocacy position is available at this link.