EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: We Recommend MYOB Shareholders Vote Against the KKR Acquisition. See Updated Analyst Note from 13 Mar 2019

We recommend MYOB shareholders vote against the KKR acquisition at the Scheme meeting on April 17, 2019. Although the offer has been recommended by MYOB’s board of directors and the independent expert, Grant Samuel, we think the AUD 3.40 per share offer price is too far below our stand-alone fair value estimate of AUD 3.94 to justify recommending. We were comfortable with the original offer price, of AUD 3.70 made last October, and the revised offer, of AUD 3.77 last November.

KKR’s decision to lower its offer price last December was justified by weak equity markets in the fourth quarter of 2018 and was initially rejected by the board. We expect the lack of other bids, the prospect of the deal falling over, and KKR and Bain Capital’s combined MYOB shareholding of over 20% were all key factors in the reversal of the board's initial opinion.

Like MYOB’s second-largest shareholder Manikay Partners, which has an 11% shareholding, we think it’s reasonable to expect the offer should be increased following the particularly strong rebound in equity markets in 2019. For example, Intuit and Xero are now trading near all-time highs, and Sage Group is up 25% from its lows late last year.

KKR’s offer will require the support of at least 75% of votes cast at the scheme meeting and 50% of all shares outstanding. On the basis that we expect the required votes to be achieved by KKR and the offer accepted, we have maintained our fair value at the AUD 3.40 offer price. Considering the AUD 3.36 market price is already effectively at the offer price, MYOB shareholders can avoid the opportunity cost of waiting for the offer to conclude, on May 8, 2019, by selling on market and allocating capital elsewhere.

The independent expert, Grant Samuel, has determined a valuation range of AUD 3.19 to AUD 3.69 per share for MYOB. However, we have little confidence in the impartiality of "independent experts" as we feel they too frequently give management the answer they are looking for and are conflicted by the remuneration they receive from the companies they evaluate.

The independent expert’s valuation range implies a fiscal 2019 enterprise value/revenue multiple of between 4.7 and 5.3 for MYOB. In comparison, Xero’s equivalent multiple is 13, Intuit’s is 9, and Sage Group’s is 4. On an EV/EBIT basis, the independent expert’s range implies 15 to 17 for MYOB, versus 29 for Intuit, 17 for Sage, and 928 for Xero. Admittedly, these figures aren’t directly comparable as different companies have different growth and reinvestment rates, but they do provide a rough guide. From MYOB’s perspective, near-term earnings are weak due to the programme of reinvestment, which means the "true" multiple being offered by KKR is arguably even lower than the headline figures indicate. We also think the inclusion of Reckon as a comparable company in the independent expert’s report, unfairly lowers the comparable multiples because Reckon’s viability as a meaningful competitor is questionable.

It’s also arguable KKR should pay a premium for achieving 100% control of MYOB. Premiums for control are usually in the region of 30% above the prevailing market price but KKR is offering a premium of 15% to the one-month volume weighted average price prior to the bid, which we feel is too low.

If the offer does not proceed, it’s likely the MYOB share price will fall significantly in the short term, and possibly below AUD 3.00 where it traded in mid-2018. However, this wouldn’t impact our fair value estimate or long-term outlook for the company, which we think is good, with a forecast EPS CAGR over the next decade of 10%.