MYOB shares surge 20pc on $1.75bn private equity bid
Morningstar analyst Gareth James warns investors against cashing in following MYOB share price rally of 20 per cent on takeover bid.
US private equity firm KKR & Co has launched a conditional $1.75 billion takeover offer for MYOB Group (ASX: MYO), causing the Australian accounting software provider's share price to surge 20 per cent. But Morningstar's Gareth James is urging investors not to rush to cash in on the rally.
In an analyst note, James said that despite the share price rally, he doesn't believe shareholders should rush out to sell at the current market price of $3.57.
"KKR’s large shareholding means it is committed to a deal in some form and its conditions precedent are undemanding," he says.
"Although due diligence is yet to be completed, and MYOB’s board of directors still to provide their opinion on the offer, we suspect KKR’s stake was built on a good understanding of the business and confidence the board will be supportive."
James wasn't particularly surprised by KKR’s takeover bid for narrow-moat-rated MYOB, pointing out that the stock has traded significantly below Morningstar's $3.82 fair value estimate for around a year, justifying its inclusion in the Australian Best Stock Ideas list.
The announcement revealed KKR had purchased 17 per cent of the company's shares from an affiliate of Bain Capital, which acquired the then privately-owned MYOB in 2011 and listed it in 2015.
Bain retains a 6.1 per cent stake in the administrative software company, the statement said.
KKR made an unsolicited $3.70 per share cash offer for the remaining 80.1 per cent of MYOB early this morning. The price represents a 24 per cent premium to MYOB's last closing share price and values the company at $2.18 billion.
The announcement did not specify if Bain was endorsing KKR's takeover offer and a spokesman for Bain was not immediately available to comment. However, Morningstar expect Bain to be supportive of the KKR offer.
Shares jump on bid news
MYOB shares soared by 20% to $3.6 billion after the announcement, their highest intraday level in almost nine months.
Speculating on the prospect of a competing bid from a trade buy James said it is possible but unlikely.
"United Kingdom-based Sage Plc is the most likely trade bidder as it already bid for MYOB in 2011 and has a history of similar overseas acquisitions," James says.
"However, KKR’s bid values MYOB at $2.2 billion, versus Sage’s market capitalisation of around $11 billion, meaning a bid is possible but potentially challenging at short notice."
A rival bid from Xero (ASX: XRO) is a near impossibility, not least because it would almost certainly be blocked by the Australian Competition and Consumer Commission, James adds.
Similarly, he doesn't expect global software giant Intuit to launch a bid either as the company already sells its cloud software in Australia and New Zealand and these markets are small relative to its global ambitions. He doubts Intuit would attempt to buy MYOB solely to attack Xero more aggressively in its core markets as "this would be a relatively expensive way to compete with its main competitor."
What is MYOB?
Once the dominant provider of accounting software to small and medium-sized businesses in Australia, MYOB has in recent years struggled to compete for market share with global cloud and administrative software company Xero Ltd.
Together they service over 80 per cent of the market although Xero's growth in Australia has outpaced MYOB's.
Xero's market value, at around $6.88 billion, is more than three times MYOB's.
KKR's non-binding offer is conditional on due diligence, obtaining financing for the deal and the full endorsement from MYOB's board of directors.
"The MYOB board has commenced an assessment of the proposal and will keep the market informed," it said in the statement.
KKR's proposal follows its 2017 acquisition of Australian non-bank lender Pepper Group for about $682 million.
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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