Idox (IDOX.L) – Merger Arbitrage – 3%+ Upside

Current Price: £0.73

Offer Price: £0.753+

Upside: 3%+

Expiration date: TBD

Press release

 

Although the spread is tiny, there is a possibility of a better offer. UK’s software solutions company Idox recently became a takeover target. Its larger, multinational peer Dye & Durham (ticker: DND.TO) made 3 indicative all-cash proposals last month:

• 9th Feb – at £0.67/share
• 17th Feb – £0.70/share (4% raise);
• 18th Feb – £0.75/share (7% increase).

Only the latest offer was announced publicly and management has entered into discussions with the buyer. PUSU (put up or shut up) date is set for the 19th of March.

Overall the situation seems interesting and is quite likely to result in a firm offer. Similar to the recently covered ARW.L case, the ongoing discussions could possibly result in another price bump for IDOX.

Moreover, on top of merger consideration shareholders of record date March 26th, will receive an annual dividend of £0.003/share payable on the 9th of April.

Downside to pre-announcement is 20%.

 

Positive aspects of this situation

• This is a purely strategic takeover – a vertical integration of two software solution providers to the government sector. Apparently, the buyer has been eyeing Idox for a while now. The strategic rationale has been expressed clearly in the press release:

Dye & Durham has evaluated this acquisition and the strategic rationale for some time. […] Having an established platform in our key markets of Canada, the United Kingdom and Australia, Idox is a natural strategic vertical asset for Dye & Durham to own as the Company provides the specialist software solutions to over 90% of local government authorities in the United Kingdom, which supports the complex operations and management of public record information. On a daily basis, Dye & Durham’s many customers across the United Kingdom access the public record information Idox’s software manages, allowing them to manage their information and regulatory requirements.

• The buyer seems credible, well-funded, and has a long track record of acquisitions (larger ones as well). Since 2013 it has made 19 acquisitions, 4 of them over the last 7 months (see more info below). Dye & Durham intends to continue the expansion in its 3 main markets – Canada, Australia, and the UK.  Last month the company raised C$500m (around £290m) to fund further expansion through M&A.
• The third acquisition offer (with a 7% price increase) was apparently announced just one day after the second offer and management immediately entered into discussions with the potential buyer. This suggests the offer might not be final yet.
• Last week, on the 12th of March, Idox announced a sale of its compliance business (£9m price) in Germany and Belgium in order to focus on the software business. With the ongoing merger discussions, such a shuffle seems like a deck-cleaning for Dye & Durham.
• The current consideration is around the all-time high share price of IDOX and was reached only one time in 2016 and a few times in 2017. However, the valuation stands at 17.6x adj. EBITDA’20, which doesn’t seem a stretch for a SaaS business with a large percentage of recurring revenues. For a few years now, Idox has been transitioning its business to a SaaS model, sold its digital business segment, replaced the management, and grew its recurring revenues frow from 47% in 2017 to 55% in 2020. The current target is to reach 75% of the recurring revenues and 30% adj. EBITDA margin (was 29% in 2020). In comparison, Ideagen, a similar size Idox peer, has already completed the transition to SaaS, reports around 80% of recurring revenues and trades at 33x TTM adj. EBITDA valuation. Some of it may be attributed to Ideagen’s rapid growth through acquisitions (in the last 3 years made 9 takeovers), however, the next step in the Idox transformation plan is also the expansion through acquisitions. Overall, from a high-level, it seems that Dye & Durham is getting a good deal here, and there is definitely some room for a further offer price bump.

• Idox shareholder base is quite concentrated with the 8 largest shareholders owning 73.2% of the shares. Most of them are various asset management firms and given that no opposition has been voiced yet, it’s likely that shareholders look favorably towards the takeover.

 

Idox

The company is a leading supplier of specialist information management software and solutions to the public and asset-intensive sectors. Over 90% of UK local authorities are customers of the company.

Idox operates in 3 sectors:

• Public Sector Software – legislative compliance and document process management software in a variety of applications – local government, local government, transport, health, social care, elections, and facilities management/administration.
• Engineering Information Management – Software solutions for energy and utility sectors. Encompasses document control, deliverables management, project collaboration, and consultancy solutions.
• Content – comprised of business services (Netherlands), databases (UK & Netherlands), and compliance (Germany & Belgium). Compliance business is now being sold.

Shareholders:

 

Dye & Durham

Dye & Durham’s products provide automated public record due diligence searches, associated document preparation, and electronic public record filings related to legal due diligence, corporate formation and maintenance, lien registration, litigation, and real estate conveyancing.

The company completed its IPO in July’2020 at C$7.50/share and currently trades at C$43/share valuation.

4 acquisitions since Dec 1, 2020:

• 5th Feb’21 – signed a definitive agreement with GlobalX, software solutions for law firms, conveyances, etc. for C$166m. The transaction is expected to close this year.
• 8th Jan’21 – closed SAI Global’s Property Division takeover in Australia for $89m.
• 10th Dec’20 – DoProcess, a real estate practice management software in Canada for C$542m.
• 23rd Sep’20 – R-Squared, UK cloud-based real estate due diligence platform for C$56.9m