Tony Morgan uses the takeover uncertainty swirling around Pushpay Holdings as an example of how an investor could assess these types of fluid situations

* Note disclaimer at the foot of this article.

Usually you want a company to be taken over because the pain has been too much. The particular stock is down and you cannot believe your eyes.

I have wished that many times with Bremworth (previously Cavalier Bremworth) as over the last five years or so it has appeared cheap versus assets. It has been a hopeless case, but maybe, just maybe the new CEO, a smart, slick chap, Greg Smith, can resurrect the wholesome pure wool manufacturer. Here’s hoping.

I had the same misgivings with a real dog of a stock Speirs Group, which was a long time ago listed on the NZX, lending to small vehicle and equipment operators. The takeover never happened. I was very lucky to sell out mostly to the managing Director and take a small beating, before the stock ultimately tanked 90% on bad performing debts. Learnt a lesson. Still own a few of these rat bags to remind me of painful mistakes! They are still listed on USX, …. just surviving. Horrible.

In 2018 Sli-Systems was taken over at 100% of what I paid a few months before. My luck in this investment stemmed from the fact that Milford and Pie Funds had had a wager a year or so before as they took out a delusional private equity player. Oh, I like following the big money, understanding that both of these institutions are a lot smarter than me. All I knew, being a womble tech geek (no idea, tech in plain language) is that Sli had a clean balance sheet and pumped cash. The funny thing is I still thought the takeover price was cheap. Even said so in the final AGM late 2018, but my words found a void. I took the money nevertheless.

And in early 2019 we had that miserable Orion Health situation whereby the founder Ian McRae had the business’s in such disarray (on appearance that is) that we all sold out very, very cheaply because the outlook (again in appearance) looked dull with no profitability in sight. Terrible, terrible, terrible. McRae scored a home run finally and his dreams our now coming to fruition. Oh, bother.

This year I was involved in a remarkable takeover of a small resonator company aptly named Resonance. What is so remarkable is that the Japanese company Murata paid almost 4x, yes four times the beaten down price that the stock was then trading on the NASDAQ. A bit lucky again I would say, given the turbulence in equity markets. Yes, that was an outliner, a real rarity.

But let’s get back to this gift of sorts we have in front of us. I am throwing the idea, situation out to readers because as you can see from my experience as a very small investor, these things happen.

This is a specific moment in time for keen investors to make a potential decision upon. In this case, a religious affair.

Pushpay (PPH, #23)

It is not a stock I own at this point, but never mind.

Here the company condensed explanation of itself in relatively simple terms;

Pushpay provides a donor management system, including donor tools, finance tools and a custom community app, a church management system (ChMS), and video streaming solutions to the faith sector, non-profit organisations and education providers located predominantly in the United States (US) and other jurisdictions. Our leading solutions simplify engagement, payments and administration, enabling our Customers to increase participation and build stronger relationships with their communities.

So, it produces software that enables Churches to communicate and manage the masses of devotes. It has been listed since 2014 on the NZX. It was a very successful investment for the Huljich family, pocketing well over $200 mln for their initiative in helping grow the company. God bless them. Real business dudes those Huljich’s, reminding me of the saying “Know when to hold them, know when to sell”.

But back to matters in front of us ... (I always get side tracked. We all have some flaws.)

What you got to seize upon and note is this NZX announcement by the Pushpay Board on the 26th April-

Pushpay Holdings Limited (NZSX:PPH, ASX:PPH, ‘Pushpay’ or ‘the Company’) advises it has recently received unsolicited, non-binding and conditional expressions of interest or approaches from third parties looking to acquire the Company. The Board has appointed Goldman Sachs to assist as financial advisor. There is no certainty that these expressions of interest or approaches will result in any transaction.

Before this, their shares were hovering just over a buck. After the above news, they quickly raced to the mid to late NZ$1.20s where they are hovering presently.

This is quite a large company. They transacted US$7.6 bln of pledges in the last financial year, a heck of a lot of giving. So, in America, their main market by far, this is still peanuts to the opportunity still lying ahead. There is well in excess of US$100 bln donated annually in America to Churches, so they are eying more market share.

Pushpay is certainly one of those unusual NZ listed entities whereby they report in US dollars. Also, the majority of their expanding employee base of about 450 are American domiciled. So, the “inside twitch”, the logic behind such a deal is that the company would be better American-owned. And already most of the major institutional shareholders are mainly American.

The big question to ask in this instance and always is in these situations, is a). What could the takeover price be? And, assuming a takeover eventuates, b) what is the probability of that happening?

Again, I emphasis this is quite a big puppy. With about 1.14 bln shares on issue we are looking at a company currently worth almost NZ$1.5 bln. And the average trade is easily 2,000,000 shares per day on the NZX. Also listed on ASX where trading is generally less liquid.

Being a NZ$1.5 billion company listed here in little NZ is quite something, thus many institutions and small investors will be keeping an eye on the next piece of news.

So the price? Well I usually get this wrong…too optimistic on my forecasts. In this instance I found myself with a Craig’s Investment Partners report. They value it at about $1.70-1.80/share, thus one could assume some price thereabouts. This is I suppose backed up again by Shareclarity, their valuation of $1.87/share.

So, you do your numbers from the price you can buy today, let’s say $1.30. So, $1.80 is almost a 38% upside. A deal could happen any day?

Let’s not be in such a hurry. What about the probability of a transaction and its consequential considerations?

Firstly, what happens when we don’t get a deal? Surely the stock will tank, thus importantly you must think about the downside on a no-deal outcome. I suggest that in that case it is likely that the shares trade down to a buck again.

So, all of a sudden you have an equation, upside to downside, +38% (50c) let’s say vs say -23% (30c) downside. You could extend this to being a ratio 38over23 (or 50:30), in another words a 1.65 win:loss ratio.

That ratio will look better should the potential takeover be at a higher price and or that downside somehow is more limited.

But then we still have to try and determine that probability of a deal actual going through.

Well let’s go back again to that initial announcement. “Multiple” (my wording) parties have shown interest. The company also reemphasised again in late May in a NYX announcement:

Since the April announcement, Pushpay has received additional interest from multiple parties. 

Today interests associated with two existing shareholders (BGH Capital and Sixth Street) have advised that they have entered into a co-operation agreement with respect to a potential transaction involving Pushpay. Pushpay notes that the agreement is not a definitive transaction agreement and can be terminated immediately by either party on notice to the other. The terms of the agreement are attached to the substantial product holder notices released by the parties.

And also

Pushpay is continuing with a process that is already underway and is in an early stage with multiple parties, to explore the potential for a transaction which is in the best interests of shareholders as a whole.

So, this baby is hot (in my opinion).

Remarkable really given the flux of equity markets and interest rates being higher you would think Pushpay might be a tough sell. No not even at a forecast price earnings of about 25x, quite lofty in many respects.  But what has to be factored in is the growth opportunity that the more sophisticated investors with zillions of cash swirling around to find a home, find appealing.

You thought religion maybe receding, that the words of Fredrick Nietzsche, ‘God is Dead’ were gospel!

Nein, no, America is full of believers who feel ever so better morally, just to push the button and give a little (and more). That giving is so much easier with Pushpay's technology and so the magic, mystery of spiritually is stronger than any perverted short-termism on any sharemarket.

Look, the probability is pretty damn high huh! Maybe a figure of 80% probability could be subscribed to that outcome. Times that to our 1.65 upside, downside scenario then you have a bookie like number of 1.5, a risk adjusted pay-out, that suggests we have a favourite here, not home and hose, but damn likely.

Gee, you can see how enticing this critter can be if you are sitting on plenty of cash, the flutter dare I say it is more heads than tales.

We could go on.

Expect a deal easily by the end of the year, and even then, we may see further bidding. Thereabouts 15,000 existing shareholders will be waiting patiently for the payoff. Many of them will probably be on their knees dreaming that Lorrain Witten (the PPH director in charge of the deal process) will not only get a deal, but it will be something transcendental, say $2 or more.

By the way, the NZX will then be pissed that another stock departs our land; bugger.

THIS IS NOT INVESTMENT ADVICE. DO NOT ACT ON THE MUSINGS HERE. This article is intended to suggest how situations like this one can be assessed. It is a general example only. Before you do anything with PPH, or any intended investment, you should get proper advice from a licensed advisor.

Tony Morgan has run a portfolio management business and an equity brokerage, both of which were purchased by Craig Investment Partners. He now runs a small family office that invests globally. Other articles in this series can be found here. And the profiles of all the NZX50 companies can be found here.