Small Caps | Dec 19 2017
Oracle's bid for Aconex represents a substantial premium. Brokers suggest a counter bid, while highly unlikely, cannot be completely ruled out, but nor can the regulators be ignored.
-Implied multiples signal a material premium to listed comparables
-FIRB, competition approvals an area of downside risk
By Eva Brocklehurst
Aconex ((ACX)), a leading provider of cloud collaboration software for the construction industry, has received an offer from Oracle at $7.80 cash per share. Brokers view this to be strong bid and, therefore, Oracle is highly unlikely to field a rival.
Aconex is considered a quality business, as its growth is based on the penetration of a superior solution and subscription model. It already has an international presence and a strong management team.
FNArena's database has six Hold ratings, with two brokers yet to comment on the bid. The consensus target prior to the takeover bid was $4.41, with four brokers subsequently lifting their targets to circa the bid price.
Macquarie considers the bid a good result for ACX shareholders, as it would remove any execution risk from the international expansion that is key to supporting the recent valuation above $5 a share.
Considering the premium being paid, there are few competitors in the space likely to have the scale or financial backing to complete a deal. The 47% premium to the last closing price is substantial, the broker notes, particularly considering the Aconex share price is up 30% over the last two months.
The proposed transaction values the company at $1.61bn, implying an enterprise value/sales multiple of 8.4x FY18 earnings. This multiple drops to 6.1x FY20 based on UBS forecasts for FY18-20 sales growth of 17%.
The broker estimates the company's global market share is more than 40%, post the acquisition of Conject. The number 2 competitor has 11% share. UBS estimates the penetration of cloud collaboration software for the construction industry will rise to 8% by 2020 from less than 5% in 2015.
Oracle has entered into a binding agreement to acquire Aconex by way of a scheme of arrangement. Aconex will be bound by exclusivity provisions as well as a 1% break fee and reimbursement fee of $16m. The likelihood of a competing bid is relatively low, UBS believes, based on the protracted nature of the negotiation and the matching rights from Oracle. As well, the offer has full support of the board, which owns 13.6% of the stock, and co-founders.
The deal makes strong strategic sense for Oracle, given it already has a presence in the sector with its Textura and Primavera software. In addition, UBS believes balance sheet strength and matching rights from Oracle would put off less-capitalised suitors operating in the construction management and design software segment.
The Regulators
The scheme is subject to court approval and Foreign Investment Review (FIRB) approval. Regulatory approval in the form of the FIRB is the key area of downside risk, Morgan Stanley points out, as well as competition concerns, given the potential combination of Aconex with Oracle's existing products in the construction vertical.
As the stock is trading in line with the bull case, and is unlikely to trade on fundamentals now, the broker concedes the race and downgrades to Equal-weight from Overweight. If the deal were to fall through, Morgan Stanley expects the stock to trade in line with its base case ($5.50), which reflects fundamental fair value.
The main upside risk is a counter bid, which Morgan Stanley does not completely dismiss given the user base of 5.5m and clear leadership on the global stage.
Based on Deutsche Bank's valuation the offer implies an 86% control premium. The broker notes the proposal follows a challenging 18 months for Aconex, as costs across R&D and sales & marketing have ramped up and it has limited long-term visibility on recurring revenue and earnings growth.
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