Pushpay Holdings Limited, known as Pushpay, is a donor management system for charities operating within the United States. It is publicly listed on the New Zealand Stock Exchange NZX and the Australian Securities Exchange ASX under the ticker code PPH.
Pushpay, takeover and profit in roughly 6 months
PPH was a particularly interesting investment, with the stock being bought after the company signed a binding scheme implementation agreement with private equity firm BGH Capital. This development followed an extended period of due diligence, and in our view represented a fairly skinny premium to pre-bid levels. While there was an attractive arbitrage on offer with the existing deal on the table, the hope was that we could see competing bidders emerge of possibly see a higher bid from BGH is institutional shareholders dug their heels in despite the board’s support of the deal.
Ultimately, that is just what happened. Institutional shareholders agitated for a higher price after BGH fell short of the votes required to pass the deal, and BGH ended up paying $1.35 per share, an 18.42% profit in roughly six months.
Current advice: Closed.
Latest recommendation: 3 May 2023, 1:00 pm
PPH held its second scheme meeting for the proposed acquisition by BGH Capital and Sixth Street, with the deal passing comfortably at the second attempt. The final obstacle is court approval which shouldn’t cause any issues, and the stock is set to cease trading on 10 May. Payment is then expected to be made between 17 and 26 May.
Assuming there are no unexpected issues, the entire holding time will be just under seven months, with members returning 16.2% (at the current exchange rate). While it was a bumpy ride, the investment worked out very well and ultimately, we got a good bump in the offer without a competing bidder entering the fray. We will update members further once we know the final payment amount in Australian dollars.
Update: 6 April 2023, 3:30 pm
The new scheme meeting has been set for 27 April (with proxy votes due on 26 April), so it is now time for members to get in votes for the scheme. Even though the resisting institutional shareholder base has been flipped and will support the increased offer price, it is prudent to submit our votes. Please note that votes submitted for the earlier scheme meeting will not be used for the new scheme meeting, so the recommendation to vote applies to all members.
To vote, please click on https://vote.linkmarketservices.com/PPH/ and follow the prompts. Once you have accessed your single holding, we recommend voting ‘FOR’ all proposed resolutions.
Assuming everything goes to plan, PPH will cease trading on 10 May and members will be paid between 17-26 May. Following the RBA’s decision to hold interest rates steady on Tuesday, the AUD has fallen relative to the NZD, and the NZ$1.42 offer is now worth $1.335 per PPH share. Members bought PPH at $1.16 and stand to return a profit of 15.1% at the current exchange rate.
Update: 16 March 2023, 9:15 am
We received great news this morning as PPH announced that the bidding consortium made up of BGH Capital and Sixth Street Advisors had agreed to increase their offer from NZ$1.34 per share to NZ$1.42 per share. At this morning’s exchange rate, the new proposal is worth roughly $1.328, a 14.5% premium to our entry price of $1.16.
Notably, the institutional shareholders that had rejected the previous offer have committed to accept the new offer price, so the offer now looks highly likely to succeed. The next step is that a new scheme meeting will be scheduled as soon as practicable, and payment is now expected in May. Previous proxy votes will no longer count, so we must re-vote once the scheme voting period opens.
While members should have had ample opportunity to get set in PPH, we may lift our buy price if the stock settles well below the offer price, as the risk has been dramatically reduced.
Update: 14 March 2023, 10:00 am
PPH announced a further extension to the deadline so that another scheme meeting can be scheduled, with the new date being tomorrow afternoon at 7.00 pm, New Zealand time. The wording within the announcement is very encouraging, with PPH stating that this extension will allow the ‘Bidder further time to progress the terms of a potential alternative proposal. The Bidder advises that this process is ongoing.’ It is clear that the bidding consortium is engaging with both the board and possibly some of the larger institutional shareholders on the register about a price that will be acceptable, and our hope remains that a compromise can be found.
We will update members once we hear further updates from PPH, and in the meantime, the stock remains a hold.
Update: 8 March 2023, 9:15 am
While it wasn’t a raised offer and a new scheme meeting date, we were pleased to see PPH’s announcement this morning that the board and bidding consortium have agreed to extend the deadline by which a new scheme meeting date can be agreed to 5 pm on 13 March. While that alone is mildly encouraging, PPH has announced that the extension is to allow the bidding consortium time to explore whether an acceptable alternative proposal can be negotiated.
Ultimately, there are many ways to navigate the takeover/scheme process and it’s apparent that the bidding consortium felt that holding firm on price would be enough to convince resisting shareholders to support the deal. That view has now clearly changed with a significant shortfall in the requisite votes needed to pass the scheme, and our best guess is that the bidding consortium is now engaging with the larger institutional shareholders that voted against the offer. The hope is that there is a price that is both acceptable to major shareholders and will still afford the upside the bidding consortium would need in turning the business around. The bidding consortium has a lot of sunk costs in this deal and at no stage declared its bid as ‘best and final’, suggesting the consortium was willing to pay more.
While we await Monday afternoon, the stock remains a hold and we remain hopeful an increase to the offer will be received.
Update: 6 March 2023, 9:30 am
The scheme meeting for the PPH deal was held on Friday and as expected, the scheme was voted down with a very comfortable margin. The ball is now back in the bidding consortium’s court, and they need to decide whether to walk away or set a new scheme date and increase their offer. The fact that only 55% of votes cast supported the offer demonstrates how low the offer was. There was no large shareholder swaying the vote, and it is highly unusual to see shareholders overwhelmingly rebut the board’s recommendation.
The bidding consortium has spent a lot of money and time on this deal, so our hope remains that they throw some more cash at shareholders. We suspect an offer in the middle of the independent experts’ range should be enough to convince resisting shareholders, and PPH and the bidding consortium have until tomorrow to announce a new scheme meeting. Stay tuned for further updates. In the meantime, PPH remains a hold.
Update: 3 March 2023, 10:30 am
The scheme meeting for the PPH deal is due to be held today, and the stock has been on a trading halt since Wednesday. The reason for the trading halt is that, as become a clear risk in recent weeks, proxy votes have come in and made it clear that the NZ$1.34 offer will not pass. In fact, only roughly 55% of votes are in support of the deal, so it’s clear the small takeover premium and independent expert’s valuation have been the death knell for the deal, at least at the current offer price.
There are a few potential outcomes from here:
- The bidding consortium refuses to increase its offer and lets the scheme fail. Given the pre-bid trading price and the recent interim results, we don’t expect a significant downside but there will be a loss from our purchase price. The low since the COVID sell-off was $0.94, and markets have improved since the bid was announced. PPH was trading a little above $1.00 when the deal was first announced.
- The bidding consortium engages with resisting institutional shareholders to find an agreeable price, and their votes are changed last minute to save the scheme.
- Finally, PPH and the bidding consortium will have until 7 March to schedule a new scheme meeting. There would be no point in doing so unless the bidding consortium had more cash up their sleeves. It is worth noting that there has been no ‘best and final price’ declaration which would be a handy negotiation tactic, so there is good reason to believe that they could pay more.
No matter the outcome today, it’s likely we will be holding the stock after the vote result is announced. The only thing that will force our exit is if the bidding consortium announces that it is walking away from the acquisition in light of the clear resistance to the offer. Stay tuned for further updates.
Update: 27 February 2023, 12:00 pm
The deadline for submitting votes for the upcoming scheme meeting is Wednesday 1 March, so it is now time to act. The reason we advised patience is that we didn’t want the company or bidder to think that the vote would be an easy win and that perhaps we could see a sweetener added to the offer of NZ$1.34 to convince resisting shareholders. The offer price is at the low end of the independent expert valuation range and at a small premium to pre-bid trading levels, and we are now aware of a group of institutional shareholders totaling 11.9% of the share register currently planning on voting down the scheme.
The frustration is that, to date, the bidding consortium (made up of BGH and Sixth Street) has held firm on the price, so we will be cutting it fine. While 11.9% of the register voting against the deal wouldn’t likely be enough to block the deal, Sixth Street is the largest shareholder and won’t be able to vote its stake. Proxy advisors Glass Lewis and ISS recommended voting for the deal, however, which will help votes flow in.
Either way, we’re looking at a close race but, in the absence of a sweetener from BGH and Sixth Street, we still wish to see the offer succeed, hence our formal recommendation to submit votes ‘FOR’ the proposed scheme. To do so, please visit https://vote.linkmarketservices.com/PPH/ and access the PPH single-holding portal where you can submit your votes. PPH shareholders should do so either today or tomorrow at the latest.
We will update members either before the meeting this Friday, or once the results are known. We could still see an increase before the meeting if the voting isn’t looking good, so we wish to be patient for now even though the risks of the deal being voted down aren’t remote. Ultimately, we feel the downside isn’t too significant so the risk/reward in holding is worthwhile.
Update: 21 February 2023, 10:00 am
We are into the final stretch of our PPH investment, with votes required by 1 March. Our advice has been to hold off from voting with the hope that a slow flow of votes could make the bidding consortium nervous and may prompt an increase in the bid. Interestingly, substantial shareholder Accident Compensation Corporation (ACC), which owns 6.2% of PPH, announced yesterday that it would vote against the proposed deal subject to no material change in market conditions.
It should be noted that the offer price was at a small premium to the prevailing stock price at the time the board was negotiating, and the market is up substantially since then. PPH has now reiterated its earnings guidance (at the top end of the range provided), and the independent expert’s report assigned a valuation range of between NZ$1.33-NZ$1.53. So, there is clearly an argument that the offer price undervalues the company.
ACC won’t be able to block the deal on its own, but with Sixth Street unable to vote its 17.1% stake, the ACC shareholding has more power than usual. PPH’s share price sold off to $1.14 yesterday on the ACC news, but our view is that the deal is still likely to complete in the absence of an increase (although it will be a lot closer than the bidding consortium would like). Given the circumstances, we wouldn’t be surprised to see the bidding consortium throw a bit more cash to get ACC over the line, and until the offer is declared ‘best and final’, we will hold out hope for a higher offer.
So, the stock remains a buy/hold at the current price and we will provide voting advice either later this week or at the beginning of next week.
Update: 07 February 2023, 10:30 am
PPH has now released its Scheme Booklet to shareholders. Consistent with earlier guidance, the scheme meeting will be held on 3 March, with proxy votes required to be submitted by 1 March. As this deal is being completed by a scheme of arrangement instead of a takeover – meaning shareholders are voting on the deal, rather than accepting the offer for their shares – we would typically be happy for members to submit their votes. However, given tech names have rallied since the price was agreed with the consortium of BGH Capital and State Street, our hope is that a tepid response from shareholders despite the board’s endorsement could prompt an increase in the offer.
So, while our intention is to vote to support the offer, there is no harm in waiting and we will provide advice close to the deadline of 1 March. Outside of the shareholder vote, the deal is on track to complete without any issues. The currency has swung wildly since we entered the stock, but at today’s exchange rate, the offer of NZ$1.34 is worth $1.227 per PPH for holders of the Australian stock, which would represent a return of 5.8% from our entry price of $1.16.
Members are recommended to hold PPH before we provide voting advice in two weeks.
Update: 31 October 2022, 11:00 am
PPH, a New Zealand-based company on the watchlist after it received an approach from private equity firm BGH Capital, announced on Friday afternoon that it has now entered into a binding scheme implementation agreement (SIA) which will see PPH paid NZ$1.34 per share. The deal is with a consortium made up of BGH and Sixth Street. Interestingly, PPH has also downgraded market expectations for FY23 revenue and profits which means that the ‘material adverse change’ clause already factors lower numbers into the documentation, although that may be the reason that the board has accepted what looks like a low premium to recent trading levels.
The conditionality of the deal looks standard with no red flags, and completion of the deal is expected to be at the beginning of the second quarter of 2023 (likely April). Considering Christmas comes between the deal being signed and completion, the longer-than-usual five months holding time is to be expected.
From our perspective, the big risk is that we are buying PPH in New Zealand dollars. While the AUD/NZD currency pair typically are highly correlated, the differing inflation/interest rate pathways that the two economies have been on have seen that correlation break down a bit, so it’s difficult to predict the way this will go over the next five months. While we won’t include a hedge in our official recommendation, we would recommend that anyone with a CFD or Forex account buy an AUD/NZD currency pair (or short an NZD/AUD pair) to hedge the NZD payment that we will be receiving.
As New Zealand corporate law is similar to that in Australia, we are comfortable buying PPH in the hope of either competing bids or simply an attractive arbitrage. The NZ shares are trading at $1.26 – a 6% discount to the bid – we would expect a slightly higher discount on the Aussie shares to reflect the currency risk. As of this morning’s currency level, the value of the offer is AUD$1.21 and the stock opened this morning at $1.14 which would give us a 6.1% arbitrage (assuming the currency remained static). Given the low bid premium, that is a price we are comfortable paying. Liquidity is limited so it may take some time to get set, but we recommend members buy PPH at no higher than $1.14 for a short-term, medium-risk investment opportunity. The reason we are classifying PPH as medium risk is that the value of the offer will move in line with the currency, but those members hedging the currency exposure can consider the investment low-risk and allocate capital accordingly.