Spin-Off – Upside TBD (very risky)
Over the last few weeks, this idea has been sent to me by several SSI subscribers. I am not a fan of this setup, but the situation is really curious and might even work out. The gist of the thesis is that EBIX intends to list its fully owned subsidiary EbixCash in India at a supposed $4.5-$5bn valuation. This compares to the current Ebix enterprise value of $1bn. You will find plenty of similar discount-to-SOTP pitches for Ebix as the company has been talking about IPOing its Indian business already for a few years. EbixCash has even issued a preliminary prospectus and applied to list in Mar’22. What has changed recently is that the company has finally received a green light from the regulator.
Today announced that it has received the final observation letter/clearance from the Securities and Exchange Board of India (SEBI) for its proposed initial Public Offering (IPO). EbixCash will now be working with its advisors on the next steps leading to the listing of EbixCash on NSE and BSE.
It might be a go time and listing procedures might be restarted shortly. If EbixCash IPO happens and if it lands anywhere close to the previously expected $4.5-$5bn valuation, Ebix shares will be a home-run from today’s prices. However, I strongly doubt it will play out this way. Looking at the underlying business of the Indian subsidiary, the multi-billion valuation just seems way beyond any justification. The company is trying to masquerade as an extremely fast-growing and also profitable ($80m in annual EBITDA) payments company, whereas in reality most of its revenue and all of its recent growth has been coming solely from the zero-gross-margin gift cards business. I am skeptical, but maybe the rules of the game are very different for IPOs in India and the company will actually manage to pull this off. Not so long ago, any company could get listed in the U.S. through SPAC, so maybe Ebix’s plan is not such a stretch as it might seem initially.
For anyone interested in digging further into this, I strongly recommend to start with this short report from Hindenburg Research (or this TLDR Twitter post) from the last year. I think this report clearly depicts the company for what it actually is. But keep in mind, that despite these allegations regulators have finally given the green light for the EbixCash IPO.
We think a substantial portion of EbixCash’s gift card revenue is non-existent. Consequently, we expect the EbixCash IPO will flop or fail. Given Ebix’s massive near-term debt load in a rising rate environment, we see significant solvency risk over the next 12 months.
If that has not discouraged you yet, some additional research notes are below.
EBIX operates three segments – EbixCash Exchanges (prepaid gift cards, international remittances and forex), Insurance Exchanges (provides software to insurance providers), and Risk Compliance Solutions (provides certificates of insurance and consulting services). Gift cards business operates primarily in India, while the remaining two are in the US and Australia. EbixCash generates c. $80m of EBITDA, whereas the two remaining Ebix businesses deliver around $40m in annual EBITDA (segment profitability is not fully disclosed).
Based on the preliminary EbixCash prospectus (March 2022) the company intends to raise INR 60bn or US$733m in IPO proceeds. Although the number of shares to be issued hasn’t been specified, the previously expected valuation range translates into c. 20% new share issuance.
Any delays or IPO cancellations, at least from the company’s side, seem unlikely. Insiders are highly incentivized to complete the offering. Directors own around 16% of EBIX (14% is held by the CEO). Moreover, CEO has received stock options for around 17% EbixCash with an exercise price of INR 20-45. At the aforementioned valuation, the IPO share price would be around INR 300+. Moreover, EBIX also very much needs this IPO in order to deleverage. On a holdco-level EBIX has $640m in debt most of which matures later this month (maturity has already been extended from Feb to May). Currently, EBIX does not have enough liquidity to cover the debt obligations ($128m in gross cash as of Dec’22) and is in discussions with Jefferies to refinance this debt. Originally, around 50% of the IPO proceeds were planned to be allocated for debt repayment.
Although 75% of EbixCash business comes from zero-gross-margin gift card business (and Hindenburg infers these revenues to be fake), the company is trying to sell a different story, potentially worthy of the $5bn price tag. Ebix positions itself as a ‘global fintech’. The IPO prospectus is filled with references to ‘payments’ business and anything related to ‘gift cards’ appears only in the risks section or disclosures in the second half of the 500-page prospectus. All of the media articles position Ebix as a rapidly growing fintech, with its CEO regarded as a ‘maverick moneymaker‘ or ‘fintech master blaster‘ or ‘master of buyouts‘, etc. If investors just blindly look at the high-level numbers (which show impressive growth) and buy this story, then maybe the EbixCash valuation could land somewhere close to multi-billion projections. India’s IPO market climate is improving, whereas stock prices for most of EbixCash payment peers (as listed in the prospectus, but none of them are comparable) have remained stable over the last year.
A few more points/risks worth highlighting:
- Last month, Ebix’s CFO resigned from his role. The departure of the key executive shortly before a planned IPO is clearly not a positive sign.
- EBIX has engaged Jefferies to assist with the nearing debt refinancing but also engaged Sidley Austin, a law firm that specializes primarily in bankruptcies, restructurings, and insolvencies. It is also quite worrying that with only a few weeks until debt maturity, no updates have been made on the refinancing yet.
- EBIX has also had multiple problems with auditors in the past, having cycled through 7 auditors since 2004. In 2021 one auditor resigned due to “unusual transactions related to the company’s gift card business”. Moreover, EBIX’s previously planned merger with Goldman Sachs in 2013 also fell through due to audit problems. At the time, EBIX was under investigation by US regulators, including a US Attorney and the FBI as a result of money laundering allegations.
EbixCash IPO roadshow seems to be ongoing with the expected listing already in July. Here are a couple of links with CEO interviews:
https://www.etnownews.com/videos/ebixcash-chairman-robin-raina-on-growth-roadmap-and-ipo-plans-et-now-video-100966944
https://online.anyflip.com/qqqhq/kmwy/mobile/index.html
I find this rather strange, given that EbixCash website for investors has not been updated since the pre-preparation for last year’s planned IPO. All financial information is as of Sep 2021 and most of the other parts have ‘coming soon…’
https://ebixcash.com/investor-relation/
The same goes for other Media press releases – the last one was posted on Nov’22.
https://ebixcash.com/all-news/
And even EbixCash offers for travelers – with all of its flight offers having expired in June.
https://ebixcash.com/ebixcash-consumer/.
Maybe that is just for the English version of the site, but I was not able to find anything else in Hindu either.
Also, Craig-Hallum recently issued a very bullish piece on the setup. This excerpt summarizes the pitch quite well.
I remain on the sidelines for this one, but maybe more adventurous subscribers will be interested in taking a dip.
I bought a few September call options. I don’t trust Raina but this is an interesting setup with the latest debt extension to 9/30 and a stipulation for a mandatory IPO by July 31. Seems they really need the IPO to happen. However, wouldn’t be surprised if there was a short report issued soon to derail the IPO process.
“Amendment No. 14 also specifically provides for the application of a certain percentage of the proceeds from certain liquidity events towards payment of outstanding principal and interest obligations at that time. These events would include the mandatory public listing of the shares of the Company’s subsidiary EbixCash Limited on the Indian stock market by July 31, 2023, the proceeds from the issuance of any additional debt and/or securities if raised by the Company and the proceeds from the monetization of any asset sale, if carried out by the Company.”
https://www.ebix.com/press-release/bbix-signs-debt-extension-amendment
Philip – Appreciate your candor on not trusting the CEO – but I am curious as to what facts have led you to this view? I am a long-time investor in the company – since 2023 and my firm also does investor relations work for the Company – so I am far from unbiased – but I do try to remain objective in my assessments and the facts I use to make them.
You are not alone in this view – and there have been a long line of shorts who have slung mud at the company with few of any of their allegations actually bearing fruit in a material way – other than to great a fairly broad spread “taint” on the Company that persists to this day. A quick look back to Aug 1, 2003 – and I see the stock price closed at $0.67 – versus its current price over $27.00, representing a 20.7% – before dividends which would have more than returned the 67 cents.
The point being – why is he not trusted? He’s delivered remarkable performance; saved the business from near death; has proven to be a visionary in repositioning the company into software services – well before SaaS was a thing, and has assembled a set of businesses in India that have the potential to be valued over $3B – if the deal can get done – but certainly are worth well more then the ~$700M it took to assemble them.
Part of the reason is that Robin Raina marches to a different drummer – eschewing the typical tech CEO courting of Wall Street (which does make our IR job harder) to optimize the share price, in favor of a low profile approach and a highly disciplined approach to capital allocation and expense management. He has basically built the company through 100 or more acquisitions – I’ve lost count – that he has negotiated and funded without the use of investment bankers. That leads us to one of Ebix’s biggest US market challenge – it does NOT have a base of prominent investment banks with analysts that are obliged to support the company in good times and bad – that is because his preference was to save the fees and reinvestment then in the business.
Importantly, he hasn’t sold a share in years and controlling over 4M shares he is the Company’s largest shareholder – so he is highly incentivized to build value. As a big fan of Warren Buffett, he’s learned that true wealth takes decades to create and the path is paved by focusing on business execution rather than the share price or the whims of the market.
Besides these pluses and minuses, I see three major issues that have gotten us to this challenged place of a very short leash to pay off over $600M in bank debt. The first issue is the Covid pandemic – which virtually shuttered the bulk of the EbixCash business related to foreign travel (B2B travel & Forex), leading to substantial decline in cash flows to service its debt – no doubt contributing to its Midwest-focused bank syndicate deciding to exit its exposure to this global business, now over 50% of which was in India.
Until 2017, Ebix’s growth through acquisition strategy had played out very well, as the business through off substantial cash flow that funded further growth efforts as well as the opportunistic repurchase of shares, trimming Ebix shares outstanding from 39.7M in March 2021 to around 30.9M currently. Over this period the shorts proved immensely effective in sowing conspiracy theories and doubts that weighed very heavily on the share price and the Company’s and CEO’s reputation – damage that lingers to this day. Turning lemons into lemonade, Ebix was very active in repurchasing its shares at what I felt were very attractive prices – I think roughly around $29.00 on average – but don’t hold me to it.)
But this gets me to the second major issue driver in the current Ebix story, which is that the company’s increasing reliance on bank debt to fund both repurchases and the build out of the EbixCash business. In a related manner, I don’t think Ebix understood the stark difference in the way it looked at the risk/reward of its India initiatives as compared to its domestic banking group, and as a result I am guessing that they felt they were a strong credit that had continued to meet its interest and principal payments. I think the combination of its Bank group’s limited exposure to Asian/India businesses, augmented by the sudden drop in cash flow that ensued with the Covid shutdown, created a perfect storm for Ebix to navigate – as rates began to climb.
The third piece – and I am not at all a conspiracy theorist – is the very clear impact that short sellers have had in sowing misinformation, lies and widespread fear and concern about Ebix, perhaps emboldened by past successes manipulating the stock as well as the absence of counterbalancing sell side research support – which makes it easier for their propaganda to gain critical mass.
Their efforts go well beyond attempts to spread their “point of view” and instead involve very active, concerted efforts to interfere with customer relationships and to initiate regulatory scrutiny to amplify their messages and worse yet – to negatively impact the progress of the company’s capital formation efforts seeking to address the coming debt maturity.
Well – I hadn’t intended to write nearly this much – but as an advocate of fairness, innocence until guilt is proven, and the importance of not judging those who are different than us for that reason alone – I wanted investors to seriously consider what hard evidence supports their point of view – or to what extent they are just playing into the things people are saying – having not done any real work to ascertain their merits.
Come on. Making investment decisions isn’t “innocence until guilt is proven”, it’s based on a preponderance of evidence. And historically one of the biggest red flags for fraudulent businesses is a campaign blaming “short sellers”, because fraudulent businesses don’t have real cash flow and rely on market offerings to sustain themselves.
Warren Buffett would love for short sellers to disparage Berkshire Hathaway and drive it’s share price down in order to enable him to buy more shares at accretive prices. So if you want to defend the CEO, reconsider your approach.
Ebix dropped 10% yesterday as the company issued a new strategic update. The update said Ebix is in a late stage negotiations to sell certain assets that would cover 100% of the debt. The fact that they’re selling assets so shortly ahead of the IPO is a big red flag. No concrete updates were made on the public offering either. The strategic update only mentioned that the company will announce the IPO listing date “as soon as it has the requisite approvals in place”.
Some people on Twitter are also saying that Ebix is planning a $145m pre-IPO placement, however, I haven’t been able to confirm this information. https://twitter.com/OldKinderhook/status/1676949682675752960
Strategic update – https://finance.yahoo.com/news/ebix-provides-strategic-124000971.html
A few updates for EBIX. The company has amended its credit agreement removing the July 31 requirement for the IPO, which would’ve otherwise triggered an event of default. The dates to post additional collateral were also pushed out by two weeks to August 14. The market has taken this as a sign that despite delays the EbixCash IPO is still on track. Yet it’s hard to believe that EBIX management would stay completely silent if the IPO was really right around the corner. Overall, this remains a very puzzling situation to me, especially given the previous announcements of large asset sale negotiations. The amendments to the credit agreement could also be easily interpreted in the opposite way – i.e. that the IPO timeline is no longer certain and the lenders have simply agreed not to trigger the default if it does not happen by the end of July / mid-August.
Moreover, the company has recently received “a letter of displeasure” from the Reserve Bank of India, which has made EbixCash refile its financials and finally change the accounting of Gift Card sale revenues from the previous gross basis to net basis. This inflated revenue accounting was one of the key EbixCash selling points to investors. On restated financials (see link below), gift card revenue has dropped from 65% of the total revenue, to just 3%. Visually, this restatement should now make it even harder to justify the US$4bn-US$5bn EbixCash IPO valuation in the eyes of investors.
The total annual revenue of Ebixcash, in turn, was reduced from over USD$800m to just north of US$300m. As I understand, this hasn’t impacted the earnings, and the growth rates are still very impressive (+55% YoY for the year ended Mar’23).
Restated financials can be found on the p.15-25 of the addendum: https://www.sebi.gov.in/filings/public-issues/jun-2023/ebixcash-limited-addendum-to-drhp_72220.html
Recent strategic update: https://www.bamsec.com/filing/119312523187587?cik=814549
Credit agreement amendment: https://www.bamsec.com/filing/119312523192271?cik=814549
Just wanted to point out that the Letter of Displeasure was disclosed back on June 1st – and the restatement of the Gift Card revenues actually resulted from a subsequent Reserve Bank of India circular that clarified the role of firms like Ebix and the accounting treatment that applied.
As for dt’s comment:
“Yet it’s hard to believe that EBIX management would stay completely silent if the IPO was really right around the corner.”
There are actually a very large number of reasons why silence is the correct approach. The IPO is a highly regulated process in India and also has a significant material impact on the US equity – making inter-milestone commentaries very hard. It appears that Ebix was reminded of this fact after its July 6th release – which resulted in a series of clarifications that seem largely in response to India regulators – as Ebix disclosed verbatim elements from the EbixCash Addendum.
Additionally – there has been a very active campaign (the past year) on the part of those seeking to depress Ebix’s share price, to regularly contact Indian regulators with an array of allegations aimed at slowing or derailing the IPO process – and unfortunately the efforts have been effective in creating distraction and delay. So the less said by Ebix – the better. Even in the US, you won’t see managements making any definitive statements about an IPO process while in registration and waiting for a deal to become effective (the best analogy to where we are in India – IMHO)- so I don’t think its strange that Ebix would be quiet on the issue.
It is also an opinion that
“This inflated revenue accounting was one of the key EbixCash selling points to investors.”
And I would strongly contest that view – as it was well understood by anyone at all familiar with the business (i.e. reviewed Ebix’s 1/4ly disclosures in releases, filings and conference calls) that the gift card (prepaid) revenues were substantial but had sub 1% gross margins AND ARE NOT AT ALL a core component of the EbixCash business (profit/cash flow) opportunity which is focused on Travel, Forex, remittances, fintech software solutions, bus ticketing and of course payments.
Historically, Ebix would avoid or shut down this type of low return business, as it has long been focused on strong operating margins. However, deep in the COVID pandemic – there was a real need for prepaid cards to help address payment challenges during the lock down. With other businesses shuttered, Ebix naturally stepped up to meet this demand, recognizing that it served a customer need and delivered good brand development/visibility for EbixCash, while key core businesses were largely offline.
Raise the bridge or lower the river – the gift cards sales did significantly raise revenues but also significantly impacted consolidated margins – and so the change in revenue treatment from gross to net did cut revenue substantially while delivering a related improvement in overall margin – all while the bottom line remained largely unchanged. It remains to be seen how investors view the EbixCash financial performance during and exiting the pandemic. The bigger issue is where the business can go as India returns to business as normal in one of the world’s most promising economies.
What’s amazing is how effectively the shorts were able to weaponize this non-core segment of the business – paint it as fraud despite very active regulatory review, getting investors to “look over here at this problem” and take their eye off the actual purpose and potential of the EbixCash platform.
There remain a number of key unknowns as Ebix seeks to unlock value to address its looming debt maturity – but there I believe there is substantial underlying business value to should support it in getting this done – one way or the other. Happy to answer any specific questions you might have on Ebix – you can write me at [email protected] if you like.
Replying to Crandyhill, I would say that yes, blaming shorts is a red flag and I am loathe to do it – however the facts very clearly point to their role in undermining the company, its share price and managements’ integrity. It is a small part of the overall equation, but it is a factor in the current situation that is worthy of mention – despite the taint it provides.
As for the following statements – I will explain why they are well off base:
because fraudulent businesses don’t have real cash flow and rely on market offerings to sustain themselves.
Warren Buffett would love for short sellers to disparage Berkshire Hathaway and drive it’s share price down in order to enable him to buy more shares at accretive prices. So if you want to defend the CEO, reconsider your approach.
Ebix’s history is one of very strong cash flows and no market offerings. As I mentioned, using primarily internally generated cash, they purchased 8M shares somewhere around $29 per share on average over a period of 8 years.
The Company’s flows continue to be relatively strong, despite the substantial impact of the pandemic on much of their EbixCash business, which depends on the normal movement of people and commerce. Ebix has remained current on its interest and principle payments for its bank debt, though it has had to seek covenant amendments in light of various business challenges. Ebix’s margin and cost management disciplines have been impressive over the 20 years I’ve followed the Company.
As for Warren Buffett – he is an idol for Ebix’s CEO and you can see that in many of his actions such as the focus on profitable growth, strong capital allocation and share repurchases when the stock was beaten down to very low levels. Additionally, Mr. Buffett’s lack of enthusiasm for promoting his stock is shared by Ebix’s CEO who spends little time courting investors and instead remains focused on building value through long term compounding.
Yes – through a combination of events – the Company is now in a challenging position of addressing its coming bank maturity via capital markets transactions. It’s not that Company is unable to service its debt or is even crazily over-leveraged – that is not the case. It is because this is very challenging time to seek bank or other funding and the Company’s Midwestern Bank group turns out to not be the best fit for an India-focused Company that faced significant business challenges because of the pandemic.
Ebix reported Q2 earnings, and quite surprisingly almost nothing was said about the EbixCash IPO aside from:
“The Registrant’s subsidiary, EbixCash Limited has filed a draft red herring prospectus with the Securities and Exchange Board of India and is in the process of executing an initial public offering of its equity shares, subject to market conditions and regulatory approvals”.
Previous earnings releases included optimistic comments from Ebix CEO about the upcoming EbixCash IPO.
Maybe additional details will be shared in the conference call. However, I remain skeptical EbixCash IPO will happen.
https://www.globenewswire.com/news-release/2023/08/09/2721657/0/en/Ebix-Announces-Q2-2023-Results.html
It looks like this tweet (or events described in it) have been at least partially responsible for yesterday’s the sell-off in EBIX stock:
“$EBIX’s latest auditor, KG Somani, was censured days ago by the PCAOB for audit failures related to its work on Ebix, with its named partner, Anuj Somani, barred for a year.”
https://twitter.com/NateHindenburg/status/1689650386041462786