Is Elmo Software getting a better takeover offer?

Elmo Software (ASX: ELO) has gone into a trading halt this morning pending news of ‘possible corporate activity’. This is seemingly alluding to media reports suggesting a takeover offer for the company, which provides cloud payroll and HR software. This would not be the first time it received an offer this year. But will a deal go ahead and what does the future hold if it doesn’t?

 

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Accel-KKR is reportedly interested in Elmo Software (again)

The AFR has reported that Elmo Software has been confidentially taking a handful of potential suitors through due-diligence and has hired UBS to assist it. One of these suitors is American private equity firm Accel-KKR, which actually made a non-binding bid earlier this year, only to walk away and come back now. The AFR reported that ‘the talks were incomplete and ongoing’.

ASX Listing Rules require companies to disclose price-sensitive information immediately. Discussions about corporate transactions are allowed to take place behind closed doors until a formal bid is made, although when reports leak out to the media a company has to respond to the speculation. 

 

 

What if talks fall through?

Elmo Software is in a trading halt until Monday at which point it may have a binding offer or just confirm to investors that talks have occured. Inevitably, shareholders will be excited about this news when it exits a trading halt. But what if these talks amount to nothing? What does the future hold?

We’ve written about Elmo Software twice before, most recently in mid-May. As we observed back then, the stock has been sold off because of rising inflation and interest rates, like most tech stocks. But investors fear it will be hit more than others because of its focus on SMEs.

 

Elmo Software is still loss-making

Additionally, profit margins get squeezed as suppliers hike prices and customers reduce spending. And although Elmo Software is EBITDA profitable, it still isn’t NPAT profitable and its NPAT loss has ballooned out to $79m from $26.7m in FY21.

Its EV/EBITDA multiple doesn’t look excessive at 14.7x, but having dropped 70% in two and a half years, the risk of catching a falling knife is too high here, especially when you consider how badly investors re-acted in June when Accel-KKR first walked away.

 

 

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