Wagons circle on Infomedia: Today’s $1.75 a share bid unlikely to be the last

Infomedia (ASX:IFM) was up 4.95% at the open after revelations this morning that American tech-focused private equity firm Battery Ventures has offered a non-binding $1.75 a share bid for the midcap automotive industry software company.

Today’s bid by Battery Ventures follows a conditional non-binding indicative proposal of $1.70 a share offer from a consortium comprising TA Associates and Viburnum earlier this month.

Battery Ventures’ indicative offer is expected to be funded from its existing funds.

News of TA Associates takeover offer 16 May – which represented a 32.8% premium to the Infomedia share price prior to its trading halt - saw the share price jump 28% to $1.64.

Given the speculation around the likelihood of a third offer from US private equity firm Genstar Capital-owned auto software business OEConnection, Infomedia appears unlikely to accept the latest offer by Battery Ventures.

What’s the attraction?

With the share price still well under the $2.10 it was trading at early November 2019, Infomedia’s potential suitors are clearly drawn to the stock’s relatively attractive trading multiples.

Based on last Friday’s closing price ($1.64), the group was valued at 26.4-times forward earnings per share, which implies 3.7-times forward revenue on an EV-to-sales basis.

Bell Potter at the time regarded TA Associates’ $1.70 a share headline price as reasonable.

Still money on the table

However, E&P analysts believe private equity could conceivably stump-up closer to $1.90 a share for Infomedia. Private equity clearly feels the right input could quickly address internal issues that may have been holding the company back.

There’s also an underlying assumption that despite the recent capital market beat-up, the company - which sells cataloguing software to the global automotive industry - can still deliver a 20% to 25% internal rate of return (IRR) to private equity that may want out as early as 2025.

Guidance on track

Despite Hyundai in Italy recently terminating their Microcat electronic parts catalogue (EPC) contract with Infomedia, the company confirms that it remains on track to deliver FY22 revenue within the guidance range of $119m to $123m.

At the half year Infomedia reported revenue of $59.0m up 24% on the previous period.

Underlying Cash earnings - the key operational measure for the business - was $13.3m, up from $9.2m, or 45% on the previous period.

At the half year, management noted:

“Infomedia Ltd is a highly cash generative business and maintains a solid financial position… 95% of our revenues are recurring, we have global presence – a perspective which is increasingly important to our customers.”

Infomedia share price over three months

Consensus on Infomedia is Strong Buy.

Based on Morningstar's fair value of $2.05, the stock appears to be undervalued.

UBS expects Infomedia to continue benefitting from strong top line growth and operating leverage, and retains a Buy rating and target price of $2.15.