EDITORIAL: Adapt IT shareholders have reason to hold out for more
Durban-based software company’s share price shoots up, and might go even higher
Shareholders in Adapt IT, a small but fast-growing software IT company based in Durban, are partying like it’s 1999.
Already the subject of an all-share takeover offer from rival Huge Group, Adapt IT advised investors last week that Volaris, a unit of Canada’s Constellation Software, put in a firm cash offer of R1bn.
It’s not a small amount for a company valued at R650m before the news broke last Monday. No wonder Adapt IT’s share price shot up nearly 40% on Thursday — the day after Volaris’s firm intention to buy the company was made public.
The stock added another 4% on Friday, valuing Adapt IT at just more than R900m and putting pressure on Huge to sweeten its all-paper bid, which was announced in December 2020 and valued its target at about R800m.
Sbu Shabalala, the software engineer CEO who helped set up the company in the mid 2000s, and other senior executives at Adapt IT have rallied behind the Volaris cash offer.
Judging by Shabalala’s comments to Business Day last week — when he said unlike Huge Group’s hostile approach, friendly talks with Volaris since December allowed both companies to work out cost-saving overlaps — Huge’s offer does not have the support of the senior rank.
It is easy to see the reasons behind Adapt IT executive leadership’s stance. Under the Huge Group’s offer, framed as an opportunity to create a larger IT software company that will take the fight to bigger players such as EOH and Dimension Data, Adapt IT investors will get 0.9 Huge shares for every Adapt IT ordinary share.
That swap ratio is based on a price of R6.13 per Huge share and implied an offer price of R5.52 per Adapt IT share. But there’s a problem: Huge’s share price has been falling, chipping away at the commercial merits of its offer, especially now when there is a substantially higher offer that promises investors an easy cash payout.
Furthermore, trading in the stock is under investigation by the capital market watchdog, the Financial Sector Conduct Authority, after a minority investor in Adapt IT lodged a complaint that Huge had been propping its share price with carefully timed share buybacks to support its offer for Adapt IT.
Huge denies any wrongdoing and vowed to continue with the programme but the share price is still below R6.13 per share to make the swap ratio commercially sensible for Adapt IT investors.
Shareholders, especially those who buy into Huge’s proposition that the all-share tie-up with Adapt IT will create a bigger company without robbing them of an opportunity to participate in the potential upside in the share price of the combined entity, might be licking their lips that Huge will soon recognise the inferiority of its offer.
Sadly, it’s doubtful that Huge, which has been splashing out on the share buyback programme, has the stomach to take on Volaris. With deep pockets and determination to create an African IT champion, Volaris’s $25bn (about R365bn) Toronto-listed parent Constellation Software can easily muscle aside Huge.
That said, Volaris’s offer has a whiff of opportunism. Under the deal, Volaris is offering R6.50 per share, a 56.3% premium on the closing price on April 1, the day before the signing of the agreement, and valuing Adapt IT at about R1bn.
The offer is more than a third below Adapt IT’s recent peak of about R9.85 just three years ago and comes just as Adapt IT prepares to participate in a hoped-for post-Covid economic recovery after slashing costs and debt in 2020.
It’s true that the IT sector lost favour with local investors after the EOH scandal, but it is inexplicable that Adapt IT is trading at about 11 times historical price to earnings — about half what a similar company, Logo Yatirim, is trading at in Turkey, the country which faces its own macroeconomic headwinds.
While Shabalala, who it is not clear would keep his job if the deal goes through, is fully behind the Volaris offer, the independent board is still evaluating it.
Given Adapt IT’s healthy balance sheet, the prospect of an economic recovery and low valuations in the IT sector, shareholders will not be wrong to hold out for a sweetened offers.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.