After more than 15 years of languishing in near-obscurity on the JSE’s AltX market, SilverBridge — a small technology company with a niche in the insurance sector — is suddenly enjoying its day in the sun. Still, some shareholders are taking a dim view of developments.
The share is up 36% in the past 30 days with a recently tabled takeover offer, replete with upwardly revised offer price, creating some rarely seen froth.
In February, the FM speculated that SilverBridge was primed for a takeout, with the asset-lite company barely trading above its NAV. At the interim stage to end-December, the company had free cash of R14m, which equates to a chunky 42c a share (or 56c a share, if shares held in treasury are stripped out).
So it was not totally surprising that a few weeks after the FM article, UK-based investor Rox Equity Partners — which has some familiar faces on its board — made an unsolicited takeover offer at 152.5c a share. In the ensuing weeks there has been a low rumble of dissent from certain minority shareholders, though the FM has not been made aware of any official resistance to the Rox offer.
However, last week Rox unexpectedly upped its initial buyout bid by a whopping 31%, pitching a new takeout offer to SilverBridge shareholders of 200c a share. The offer values SilverBridge — one of the JSE’s genuine microcaps — at about R67m, or R50m if treasury shares are excluded.
One might have expected minority shareholders to be well pleased with the new offer, which represents a 65% premium to SilverBridge’s share price at the time the FM first speculated that a buyout could be on the cards. But there is now a contention that Rox, despite the sharply hiked buyout price, will get an absolute bargain if the SilverBridge buyout succeeds. Yet SilverBridge’s recent financial statements might at first sight not support such a contention.
In the half-year to end-December, SilverBridge produced more than respectable earnings of 9c a share. What does stand out, though, is that the company operates on a sliver of a margin, with interim revenues of R53m seriously eroded by operating costs of R50m. And it’s not as if directors are gushing about prospects either. In the recent interim report, CEO Jaco Swanepoel said: “Our environment remains complex with many changes and challenges facing the industry.”
However, he added: “We still see opportunity for growth and have started to see longer-term decisions being made in the industry.”
Of course, the sudden upping of the offer price by Rox might cause shareholders to ponder what exactly is so attractive about SilverBridge’s longer-term prospects.
Opportune Investments chief investment officer Chris Logan, a longtime SilverBridge shareholder, reckons shareholders should be aware that Rox is a smart operator which has timed its offer to perfection. “Rox is likely to make an exceptional return on delisting SilverBridge at 200c a share — the same price SilverBridge placed shares at when it [reverse]-listed in 2006.”
There is a familiar SA connection to Rox, with Barney Esterhuyzen (who was a prime mover in sports investment business SAIL and CEO of Christo Wiese-controlled vehicle tracking group DigiCore) serving as nonexecutive chair. Former banker Paul Leaf-Wright (who served in key roles at NBS and BoE and now heads Leaf Capital) is also listed as a nonexecutive director.
Logan contends that until recently, SilverBridge was ex-growth, with its software installations shrinking from 33 to 30 over the past five years. “But interims to December 31 2021 reveal 13% revenue growth, the strongest growth since 2010. The catalyst to the improved growth is SilverBridge having recently packaged its product as a SAAS [software as a service] offering running off Microsoft Azure Cloud.”
Logan believes this vastly improved SAAS offering expands Silverbridge’s addressable market, enabling it to target not just Africa but also the UK and former British colonies.
Logan argues that with SilverBridge on track to report revenue of more than R100m this financial year, the offer equates to a price-to-revenue of about 0.5 times.
He points out software companies trade on high price-to-revenue multiples with the average in the US at 12.44 times, which gives some indication of the potential upside.
We still see opportunity for growth and have started to see longer-term decisions being made in the industry
— SilverBridge CEO Jaco Swanepoel
Logan reckons that while the SilverBridge share price is depressed by far lower profitability than its US counterparts, profits could easily be boosted by cutting its astonishingly high personnel expenses, which consumed 74c of every R1 of revenue in the 2021 financial year.
“[This] largesse makes SilverBridge particularly vulnerable to a cheap delisting, and nowhere is it more apparent than at the director level, with SilverBridge’s directors’ fees of R11.3m in financial 2021 being three times its bottom line of R3.8m.”
By way of small-cap comparison, SilverBridge directors’ fees exceeded those of perennially profitable packaging group Bowler Metcalf, which has a market capitalisation 25 times bigger than SilverBridge.
While SilverBridge has not officially outlined the rationale for tabling the Rox offer, it is easy to understand the company’s predicament. It is looking to grow its target market, but would probably find it difficult to use its lowly rated scrip to raise capital from current shareholders, or even look to place paper with new investors on the JSE.
Rox, which presumably has a decent war chest (especially after exiting the investment in health-care company ICAS), can efficiently back SilverBridge into new operating areas in Africa and abroad.
Leaf-Wright tells the FM that SilverBridge needs access to capital to grow its business into insurance and health sectors abroad, and concurs that raising capital on the JSE would be difficult for such a small-cap company. “We like the SilverBridge management team and its services offering. We know it needs access to capital to grow the business.”
The upcoming circular should make intriguing reading when it comes to providing details about SilverBridge’s future plans and Rox’s role. The fair and reasonable pronouncement will also be eagerly awaited and the FM suspects the offer will be deemed reasonable (considering the premium to the historic share price) but not fair (considering growth prospects).
Leaf-Wright says shareholders will be allowed to stay aboard an unlisted SilverBridge, which might placate punters peeved at the takeover pricing. The illiquidity in SilverBridge’s shares has, in any case, made a transition to an unlisted company, and possible over-the-counter trading, fairly easy.
In the meantime, shareholders might be wondering whether Rox’s unsolicited approach — and particularly the willingness to up the offer price — could make the SilverBridge board pause to consider whether shareholders might not be best served by shopping the company around to other potential investors. A bidding war could really make things interesting.
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