EUR 850.00 For Business Accounts Only

Morningstar | KKR Offers a Fair Price for MYOB but Little Reason to Sell Just Yet. See Updated Analyst Note from 07 Oct 2018

We aren’t particularly surprised by KKR’s AUD 3.70 per share takeover bid for narrow-moat-rated MYOB as the stock has traded significantly below our AUD 3.82 fair value estimate for around a year, which justified inclusion on our Best Ideas list. KKR already holds 19.9% of MYOB’s shares following purchases both on market and of a 17.6% stake from Bain Capital for AUD 3.15 per share. Bain has retained a 6.1% stake in MYOB, presumably to prevent KKR’s stake from reaching 20.0% just yet, which would have various legal ramifications. However, we expect Bain to be supportive of the KKR offer.

Despite the share price rally following the offer, we don’t believe shareholders should rush out to sell at the current market price of AUD 3.57. KKR’s large shareholding means it is committed to a deal in some form and its conditions precedent are undemanding. 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.

A competing bid from a trade buyer 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. However, KKR’s bid values MYOB at AUD 2.2 billion, versus Sage’s market capitalisation of around AUD 11 billion, meaning a bid is possible but potentially challenging at short notice. Sage is also in a very different situation now compared with 2011 as the emergence of cloud software has undermined the logic of global acquisitions to some degree and has also enabled Intuit and Xero to aggressively attack Sage’s core U.K. market.

A rival bid from Xero is a near impossibility, not least because it would almost certainly be blocked by the Australian Competition and Consumer Commission, or ACCC, for similar competitive reasons that prevented an acquisition of Reckon by MYOB. Xero’s business model is also based on scaling its own platform rather than acquiring a similar platform or expanding into the mid to large enterprise software segment. Similarly, we don’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. We also doubt 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.