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Morningstar | Manikay Partners Unlikely to Derail KKR Acquisition of MYOB. See Updated Analyst Note from 05 Mar 2019

We don’t expect U.S.-based hedge fund Manikay Partners to derail KKR’s takeover of narrow-moat-rated MYOB. We have maintained our fair value estimate at KKR’s AUD 3.40 per share offer price and continue to believe the shares are fairly valued. We think the risk of the offer collapsing is low but greater than the chance of an alternative higher offer. Considering the AUD 3.39 market price is already at the offer price, MYOB shareholders can avoid the opportunity cost of waiting for the offer to conclude by selling on market and allocating capital elsewhere. We will provide our recommendation on the KKR offer following the release of the Scheme booklet, which we expect later this month.

Manikay has acquired 9.9% of MYOB and has written to the MYOB board urging it to reject the KKR offer on the basis that Manikay values MYOB "...well above AUD 4.00 per share..." However, prior to KKR’s initial offer, the MYOB share price traded below AUD 3.00 with the market concerned about management’s reinvestment plans and the failure of the Reckon acquisition. MYOB also faced increasing competition from Intuit and Xero. In this context, the KKR offer looked reasonable, and was close to our AUD 3.82 fair value at the time.

KKR’s decision to lower its offer to AUD 3.40 per share last December followed an increase in its offer to AUD 3.77, the conclusion of due diligence, and a very weak quarter for equity markets, particularly technology stocks. The MYOB board’s initial rejection of the revised offer lasted only four days before it was recommended in late December on the basis it could also seek other offers. We expect the board recommended the offer following shareholder pressure.

It’s telling that no other offers have emerged for MYOB in the five months since KKR’s initial offer, which puts KKR in a strong bargaining position. KKR’s intention to sell into any superior offer also indicates the offer is reasonable. We think an alternative offer is unlikely, partly because MYOB’s competitors are more interested in organic than acquired growth.

Without any alternative offers, Manikay hopes for one of two outcomes: KKR to increase its offer, or a rejection of the KKR offer by the board. We think both scenarios are unlikely. First, we doubt KKR will raise its offer when no other offers exist, and the board has recommended its offer. The independent expert’s report, or IER, is currently being reviewed by ASIC but has concluded the offer is in the best interests of shareholders which will only strengthen the board’s support of the offer.

It’s also possible KKR will fail to reach the 75% shareholder support required for the Scheme of Arrangement to proceed. But KKR already holds 19.9% of the company, has the support of the board, and is in a strong position. We also expect other shareholders will be concerned about the share price returning to preoffer levels, particularly considering the potential overhang of KKR’s and Manikay’s stock.

Manikay’s argument has some logic, considering the recent rally in equity markets and particularly technology stocks. Intuit is up 28% year to date, Xero is up 16%, and Sage Group is up 19%. On a comparable valuation basis, the MYOB offer price looks low, implying an enterprise value/revenue multiple of about 5, versus 13 for Xero, and 9 for Intuit. It also looks low relative to our AUD 3.94 stand-alone fair value. The board’s support of the offer also indicates shareholder support exists and we think it’s probably too late in the process to stop the acquisition now.