ReadyTech soars on takeover offer

ReadyTech (ASX: RDY) was up 27.78% an hour out from the open after the education and workforce software group confirmed market rumours that Australian private equity firm Pacific Equity Partners (PEP) has made a conditional, non-binding bid to acquire the business for $4.50 a share.

The $4.50 bid represents a 30% premium to Monday’s closing price which values ReadyTech at around $500m on an enterprise value basis.

While PEP is working on the bid with Pemba Capital Partners - a large shareholder with a 32.01% stake in ReadyTech - there is no agreement in place as yet.

While ReadyTech was quick to remind investors there is no certainty these discussions will result in any transaction, the company has granted PEP non-exclusive access to non-public due diligence information to allow it to develop a more certain proposal.

What does ReadyTech do?

To the uninitiated, ReadyTech – which listed over three years ago at $1.51 a share - provides student management systems to education and training groups, SaaS payroll and HR software and case management software to government and justice departments.

Unlike a lot of stocks in the tech sector, which has been a whipping post for investors this year, ReadyTech has been a consistently profitable business.

In the year to June 30, ReadyTech reported $78.3m revenue, $27.5munderlying earnings (EBITDA), and underlying profit of $14.3m.

While the share price is down -15% over one year, the stock has outperformed its peers, and as of yesterday was trading at 3.6-times forecast revenue and 10.6-times next 12 months earnings (EBITDA).

Easy prey

With the S&P/ASX All Tech Index down -35% over the past year, private equity has been circling sold-off Australian software companies for some time.

Attractive valuation metrics aside, what’s also attracting a slew of strategic suitors from the US to stocks like ReadyTech is the underlying strength of the US$ which makes for near-perfect takeover conditions.

In the past three months alone, Nearmap (ASX: NEA), Elmo Software (ASX: ELO), Nitro Software (ASX: NTO), Infomedia (ASX: IFM), Pushpay (ASX: PPH) and Tyro Payments (ASX: TYR) have all attracted takeover offers.

Organic growth

ReadyTech’s management has repeatedly talked about growing organically over the next three years at a rate of 15%-plus, which is why suitors wanting to take the company over have been circling for some time.

Equally attractive to a would-be acquirer is the stickiness of ReadyTech’s client-base.

In short, user reluctance to replace this software means the revenue churn remains relatively low, while also increasing the company’s ability pass on costs within an inflationary environment.

Not everyone is happy

While ReadyTech walks PEP through due diligence, it’s understood that company’s second-biggest shareholder (13.17%) Sydney-based small cap fund manager Microequities Asset Management has made its objections to the bid abundantly clear.

Microequities CIO Carlos Gil equated ReadyTech to “a Technology One in the making” and having been a shareholder since the IPO, reiterated the company’s commitment to a long-term investment journey.

“We have zero interest in selling the company for a 40% pop on its currently farcical mark to market price,” Gil noted.

What brokers think

Consensus on ReadyTech is Strong Buy.

Goldman Sachs believes ReadyTech is one stock that’s been flying under the radar post results and has a Buy rating and target price of $4.30.

Based on Morningstar’s fair value of $3.89 the stock now appears to be slightly overvalued.

Prior to today’s takeover offer, Macquarie had an Outperform rating and a target price of $4.20.

ReadyTech share price over three months.