Huge Group has set out in detail why it wants to buy fellow JSE-listed technology company Adapt IT in an all-share deal valued at R795-million.
In a document setting out the rationale for the unsolicited offer to acquire Adapt IT, Huge Group – a specialist telecommunications company – said buying the software services group will create a company that is better valued by the market, with improved shareholder returns.
“Huge and Adapt IT are facing headwinds in the further development of their respective portfolios of companies,” Huge Group said in the document (Microsoft Word file), which will be used in circulars that will be issued to shareholders and other stakeholders. “Organic revenue growth in the last 24 months has been pedestrian, which implies that growth through acquisition is key.”
- The share prices of the two companies do not reflect their underlying intrinsic value;
- The tradability of Huge Group shares relative to Adapt IT shares is low; and
- Adapt IT has relatively high levels of interest-bearing debt on its balance sheet, which increases the perception of risk. (Adapt IT reported interim results last week showing it has brought its debt down to more manageable levels, with net gearing at 42%.)
“These factors, largely attributable to limited investment scale, have an impact on investment appeal and result in a value gap,” Huge Group said. “Furthermore, if listed companies cannot raise equity capital, or can only do so at prices less than their intrinsic value, then they are unable to fund acquisitions using equity in a non-value-dilutive way. The options that are available to larger market capitalisation companies are either not available to Huge and Adapt IT, or pricing is punitive, limiting the extent to which Huge and Adapt IT can grow, optimise their portfolios of companies, extract return-enhancing synergies and generally pursue acquisitive growth.”
Both companies are cash-generative, high-margin, annuity-revenue companies with lower risk profiles than many other investment alternatives, Huge Group added in the document. “Huge and Adapt IT will grow as standalone entities, but the Huge board certainly believes that they can grow faster together than apart. The Huge board is of the view that Huge and Adapt IT are ‘better off together’, make for a compelling investment story on a combined basis, and can deliver greater shareholder returns together.”
It said that the strategic rationale underpinning the Huge offer includes:
- The value of investment scale delivered through a merger;
- Attractive synergies, fit and alignment between the businesses;
- Greater customer “real estate”, reach and growth opportunities;
- An enhanced profile, greater investor confidence and better access to capital, while lowering the combined cost of capital;
- Improved share price trading performance;
- A larger, lower cost, more profitable business, with the potential to recognise other cost synergies and efficiencies; and
- Expanding the collective base of reference shareholders and management executives.
Specifically, a combined entity will create a listed company with greater investment scale and potentially a higher market capitalisation with a broader base of reference stakeholders whose shares are more tradable, Huge Group said. The entity will also have a proactive investment strategy, aggressively pursue acquisition opportunities, and have a dealing-making bias with better prospects for acquisitive growth and with lower levels of debt.
Huge Group announced its pursuit of Adapt IT in late January, offering shareholders R5.52/share – a 33% premium to the 30-day weighted average traded price of Adapt IT shares immediately prior to the offer being made. If all shareholders accept the offer, Huge Group will have to issue about 130 million new shares.
Adapt IT has since established an independent board to consider the unsolicited bid and determine if the offer price is fair. This independent board recently appointed Nodus Capital TS as an independent expert to “express an opinion on whether the Huge offer consideration is fair and reasonable to Adapt IT shareholders, taking into account the value of Adapt IT’s shares”. The independent board will make its findings known in due course.
Duncan McLeod is editor of TechCentral, on which this article was first published here.