Accounting software company MYOB Group Limited (ASX: MYO) is set to list on the ASX early next month, but several signs suggest the IPO is higher risk than many investors might assume.
MYOB was a publicly listed company until early 2009, when it was taken over by private equity firm Archer Capital, which then onsold MYOB to another private equity firm, Bain Capital, for a reported $1.2 billion in 2011. Archer made a huge gain on the sale, having picked up MYOB for around $500 million.
Now, Bain Capital is looking to list MYOB on the ASX for around $2 billion, selling between 208 and 277 million shares at a price between $3.00 to $4.00 to the public. Bain and existing shareholders will retain 356 million shares or around 60% of the business. Bain will be able to sell one-third of its shares on certain conditions after MYOB's 2015 full year financial results are released, or in full after the release of the first half of 2016 financial results.
And that leads into my 3 reasons why the MYOB IPO won't be hugely successful.
Private equity firm Bain appears headed for the exits by February 2016. If the investment company was confident of MYOB's future, it wouldn't be bringing the company to an IPO now, or it would escrow shares for a longer time frame – say MYOB's 2016 full year financial results, due in August 2016. We should also remember Warren Buffett's words, "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."
Despite the wide price range from $3.00 to $4.00, shares appear to be overpriced. At $3.00, the pro-forma 2016 financial year P/E ratio is 20.9x, rising to 24.9x for $4.00 per share. A low dividend yield accompanies that – with a range from 2.8% to 3.3%. With $435 million of net debt at the end of December 2014, that's nearly 3 times MYOB's 2015 forecast earnings before interest, tax, depreciation and amortisation (EBITDA).
Last, but not least, MYOB is relying on thousands of customers moving from its legacy desktop software to its cloud products to generate strong growth. But it seems competitor Xero FPO NZ (ASX: XRO) Xero Limited (NZE: XRO) is growing faster. Unlike a simple upgrade between software versions, moving from desktop software to a cloud version is a much more difficult process. As such, many MYOB customers may opt to switch to Xero. MYOB already appears to be losing market share in Australia, as colleague Matt Joass wrote for Fairfax media earlier this year.
