vendredi 28 juillet 2017


Date of analysis: 28/07/2017
Price: CAD 1,10$ (USD 0,88$)
Nb of shares: 108519936 (but special situation here !)
Market cap: 119M

Redknee - a special situation

Redknee is a Canadian software company founded in 1999 (mainly involved in billing for Telecom companies) and was still managed by its founder Lucas Skoczvowski (till beginning of 2017) who wanted to grow its company via two acquisitions that did not produce the expected results (declining revenues, declining margins, losses,...) due to poor execution (Nokia Siemens Network in 2013 and Orga systems in 1995). The consequence is that the company breached covenants.

On 10th August 2016, ESX Capital announced that it has acquired 12 500 00 common shares (11,55% of the company) at a cost between CAD $1,5 and CAD $1,7. The interesting thing is that ESX Capital is a specialized company in turnaround in the software environment.

In December 2016, the company received an offer from ESX Capital, better than a previous offer from Constellation software:

  • 80M$ in preferred shares at a rate of 10%, redeemable after 10 years;
  • A 10 years warrant to get 60M$ of shares of the company (that will later translate into 46,2M$ additional shares). The strike is initially at 1,293$, but with the rights offering described below, the strike price is brought to 0,73 USD and 0,68 USD to avoid the dilution due to the rights offering and the additional rights to maintain the 39% of ESX Capital share in the capital.

Following this, ESX Capital announces a right offering to get 60M$ in order to finance the transformation. It will eventually be one right per share to acquire a share at 0,5$ and raise 54,2M$. There is also an anti dilution process for the warrant announced in December 2016 for which ESX can buy additional rights to maintain its 39% share of the capital, adding 46,2M shares at 0,5$, brining additional 23,1M$. Additionally, there are 2500000 warrants with a strike price at 0,5$ expiring in 10 years.

Basically, given the commitment of ESX and the low strike prices of the warrants, I consider that all the rights and warrants will be exercised and the number of shares will be:
108M (inital number of shares) + 46,2M (warrant December 2016) + 108M (right offering) + 2,5M + 46,2M (anti dilution rights) = 311M shares.

This is interesting as, to me, with this right offering, ESX is trying to get a bigger share of the company at a low price. 

Now let's see what would be the net debt.
At 31st March 2017:

  • Cash: 43M$
  • Pension: 20M$
  • Debt: 0M$
  • Preferred: 80M$

So, net debt is 57M$

Right offering will bring about 54M$ (that will be used within a year for the transformation) + 23,1M$, so let's say that after the right offering, net cash is 0 as this will probably be used for the R&D (see below), on top of the cash flow from operations. Therefore, EV = market cap.
Besides that, ESX announced that the revenues would be 120M$ for 2017 and that 100M$ of R&D would be needed over the next three years in order to catch up with the technologies used by the software. If the turnaround if successfull, EBITDA margin would be around 30-40% for an EBITDA at about 48M$. With an EV/EBITDA at 10, this would value the company at 480M$, i.e 1,54$ per fully diluted share in three years.
At 30% EBITDA margin with a multiple of EV/EBITDA at 8, we have an EV of 288M$ = 0,92$ per fully diluted shares.
However, with the preferred at 10%, it represents interests of 8M$ per year. So, it seems that with 10 year warrants at 0,68$, right offering at 0,5$ and preferred shares at 10%, this is a pretty sweet deal for ESX if they can manage to turnaround Redknee.
Owning shares at 1st August gives the possibility to participate to the right offering, but it seems that only Canadian residents can get the rights... In any case, I'd be for sure very interested if the price gets close to 0,6$.

At the time I'm writing these lines, the price is dropping 28% to 0,82$CAD without specific news (the final prospectus for the rights offering was published two days ago), i.e 0,66$USD, therefore I'm trying to buy a first bunch of share at these prices.

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