Australia | Sep 22 2014
– Full bid pulled
– Buyers interested in the parts
– Royalty uncertainty overhangs
By Greg Peel
Standards Australia was founded in 1922. SAI Global ((SAI)) was spun out of the organisation in 2003 and floated on the ASX. SAI’s establishment was seeded with a fifteen-year contract with Standards Australia providing the right to sell and publish some 7000 standards under the Australian Standards Publishing Agreement, for which SAI pays a 10% royalty.
That royalty has now become an issue. The original 10% deal was a sweetener to kick off the listed company when a typical standards publishing agreement involves royalty rates of 50% or more. SAI has an option to extend the Agreement for a further five years to 2023, but Standards Australia retains the right to renegotiate the terms of the royalty. Will they expect 30%, 50%, 60%? This is the great unknown.
It is also the reason private equity has backed off. In May, a consortium consisting of Private Equity Partners and KKR made an indicative bid for SAI Global at $5.10-5.25 per share, representing a 19-23% premium to the traded price of the day. After a lengthy period of assessment, PEP/KKR has decided against pursuing a bid for the full company. The consortium has cited royalty uncertainty after 2018 as its concern.
SAI’s share price, which shot up to match the bid price back in May, last week tumbled back to the point at which it was previously trading, around $4.20.
Also, SAI has announced that while it has received no full-company offer, it has received various offers from parties interested in acquiring the different businesses within the company. SAI may have begun as a standards “bearer” but today it is a highly diverse and disparate organisation.
The company’s Information Services division distributes standards and other technical information and has developed intellectual property consisting of database and workflow solutions. It offers information brokerage to banks, conveyancers and mortgage outsourcers. The Compliance Services division offers advice on governance, risk and regulatory compliance solutions including everything from newsfeed compliance to learning systems, audit support and whistle-blower management. The Assurance Services division provides assessment and conformity systems pertaining to local and international standards with particular emphasis on food quality and safety.
And that is just a very brief summation.
The bottom line is that aside from private equity looking to acquire and “flip” the conglomerate with a re-listing, SAI has no real peers that would be interested in anything other than the particular division with which it is aligned. Brokers are also concerned about the tax implications for shareholders and the value impact on remaining divisions were one or more businesses to be carved off for sale. And while the issue remains of just what royalty Standards Australia might require from 2018, Standards Australia has thrown a further spanner in the works by suggesting it might even buy back the Publishing Licence Agreement in 2023.
Notwithstanding, all this has been occurring as SAI searches for a new CEO after sacking the last one, while the company is managing the migration of clients onto its new Compliance technology platform, and while a shift to electronic conveyancing threatens an impact on earnings.
Never a dull moment in the standards business.
The issue for brokers is that SAI clearly offers value, but as to how that value is extracted and just what assessment analysts can use to put a number to that value is not at all clear. The great unknown is just what royalty SAI will be paying after 2018 and indeed whether it will still have a standards business in 2023, and whether the sum of the parts provides an equivalent value to the whole.
What we do know is that the PEP/KKR bid at $5.10-5.25 is off the table. The private equiteers have declared no further interest. Media reports suggest they are still sniffing around the various bits, and SAI management confirms other potentially interested parties are too. Beyond that, it’s all a bit cloudy.
Those brokers reassessing their recommendations to date have cut back the previous takeover premiums within their valuations to reflect the fact that while SAI no longer appears “in play” as a whole, it is still in play as a break-up. On that basis, some brokers have reverted to a sum-of-the-parts valuation while others have settled on discounted cash flow, dependent on a royalty assumption beyond 2018. Goldman Sachs has assumed 30%, Deutsche Bank 50% and Morgan Stanley has factored in potential to 60%. A risk factor, that SAI will lose its licence agreement after 2023, is then applied.
Deutsche Bank has cut its twelve month share price target to $4.75 from $5.18, JP Morgan to $4.40 from $5.18, Goldman Sachs to $4.34 from $5.23, and Morgan Stanley to $4.40 from $5.00. All four brokers retain Hold or equivalent ratings. Within FNArena’s database, other brokers are still assessing developments and as such the current ratings spread and consensus target price are invalid.
Morgan Stanley sums up the feeling: “There is clearly a lot of value to be unlocked from SAI, in our view; however, we see a long hard road to value realisation as a publicly listed company”.
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