It’s no surprise that private equity is back knocking at the door of accounting software firm MYOB. After all, the company’s two previous private equity owners, Archer Capital and Bain Capital, have extracted big returns out of their investments over the past decade.
But the latest bidder, global private equity giant KKR, may face a different set of challenges if PE lightning is to strike for a third time.
That’s because MYOB has been treading water since it rejoined the ASX in 2015, and the dramatic changes in its industry could mean that quick gains that past owners have enjoyed prove more elusive.
It’s all very cordial between bidder and target at this stage, following a weekend of intense discussion that culminated in Monday’s bid, which was revealed by The Australian Financial Review’s Street Talk column.
MYOB sources said the company had no warning of KKR’s recent interest in the business. But KKR wasn’t a total stranger, having been an unsuccessful bidder when Bain bought the business from Archer in 2011.
The KKR team from that time has largely turned over, and so has the MYOB team.
But the constant is MYOB chief executive Tim Reed. And having worked for both Archer and Bain, he would surely know the right way to handle a barbarian at the gate.
The bid price represents a 24.4 per cent premium to MYOB’s closing price last Friday, so it was no surprise to see MYOB’s shares surge 19 per cent on Monday at $3.55.
The current premium should probably be enough to get due diligence, based on the premiums seen in a string of similar deals where due diligence was granted, including Affinity’s bid for Scottish Pacific (a premium of 17.6 per cent), JCDecaux’s bid for APN Outdoor (11.5 per cent), CKI’s bid for APA Group (33 per cent) and Harbour Energy’s bid for Santos (28.2 per cent).
But it’s unlikely to win the unanimous board acceptance that is a condition of the KKR bid.
One person close to the MYOB camp suggested the board would like to see a premium somewhere closer to 40 per cent, which suggests a bid price of $4.17. That feels like a big stretch, particularly given MYOB stock hasn’t traded above $4.10 since the company listed for a second time in May 2015.
For the vast majority of its life, MYOB has been a wonderful earner for its investors – be they founder Craig Winkler and his early partners, ASX investors or private equity owners.
The company listed in 1999 with a market value of $120.2 million, and was taken private by Archer in 2008 with a value of $450 million.
Archer then sold to Bain in 2011 for about $1.3 billion, and Bain took it public again in 2015 at a market value of $2.3 billion.
But since then, returns have been hard to come by. The reason for that is best explained by its comparative returns to the market, and to Xero, the online-only competitor that has steadily eaten into MYOB’s once dominant market share in recent years.
Over the three years since listing, MYOB’s share price has fallen 9.5 per cent, compared with a 5.21 per cent rise in the ASX 200 and a 160 per cent rise in the price of Xero. Based on Monday’s close, MYOB’s market value is $2.1 billion.
Which raises the question: Can KKR repeat the big gains of Bain and Archer in a world where Xero is now a force?
Part of Reed’s response to drive growth in recent years was to try to buy smaller rival Reckon. But this deal fell over in late May, forcing him to fall back to plan B, which involves accelerating spending in sales and marketing (to grab a bigger slice of the adviser market) and investing more in R&D (to take MYOB further into the online products).
Sources close to the KKR camp said the firm arrived at MYOB’s doorstep with a growth agenda – it likes MYOB’s offering and management team, and believes its expertise in working with software groups across the world means it is well placed to help MYOB through this investment phase.
One interesting example of KKR’s past form in this area comes from Scandinavia, where in 2010 it bought a software business called Visma, which, like MYOB, focused on the SME market.
Over the course of KKR’s seven-year ownership of Visma it helped orchestrate a staggering 102 acquisitions and turned the Nordic business into Europe’s largest software-as-service business. KKR sold out in 2017 for a total return of 3.2 times.
Is that sort of growth possible with MYOB in the current environment?
It’s tough to say. But KKR isn’t mucking around, and it’s no surprise that Reed is open to the prospect of getting some high-powered help to reinvigorate MYOB.
And after three years of going sideways, a slightly higher price might have the MYOB investors ready to take the money and run.