Eroad capital raising speed and discount smacks of unexplained desperation
Something unexplained must have happened at Eroad in the five weeks between its annual shareholders' meeting and its announcement of the $50 million capital raising at 70 cents per share, because neither its haste nor its numbers add up.
Directors gave no inkling at the AGM on July 28 that the company was about to become urgently in need of fresh capital. Quite the opposite.
That meeting was just two weeks after they had turned down a $1.30 per share takeover offer, saying it “materially undervalues Eroad's business.”
So much did the offer undervalue the trucking management and data company, the directors said, that they wouldn't even grant the offeror, Volaris, a subsidiary of Canada-based company Constellation Software, access to conduct due diligence.
That in itself is puzzling; we already knew that Volaris had been prepared to pay $1.30 per share for nearly 16 million of its 21.2 million shares and had an agreement with the institutions which sold it those shares to make an escalation payment if it launched a takeover at a higher price within six months.
The sellers certainly believed Volaris might make a higher-priced offer, or they wouldn't have demanded that escalation clause. So why didn't Eroad's directors try to wrangle a higher price out of the Canadian bidder?
Negotiating clout
Volaris had wanted the takeover to be via a scheme of arrangement, and that would require it gaining the board's backing, so directors did have some negotiating clout. And the first price offered isn't usually the last, as the history of takeovers attests.
That would be especially so if they could persuade Volaris through due diligence that it should pay more.
The Volaris approach didn't just come out of the blue. You could argue that Eroad's board had expressly invited such an approach.
In May, for example, when Eroad reported its annual results, the company noted that a review by merchant bank Goldman Sachs was ongoing.
“Eroad has undertaken a review to help identify partnership options to contribute some combination of market access, expertise, and capital to drive further growth in the North American market,” it said.
If that isn't an open invitation, I don't know what is.
But after saying $1.30 per share wasn't anywhere near sufficient, the board then turned around just seven weeks later and, not only sold $38.4 million of new shares to existing shareholders, but also offered another $11.6 million to institutions who were company outsiders.
That was after chair Susan Paterson and chief financial officer Margaret Warrington made comments at the AGM 'that suggested the company had more than sufficient funds.
Financial discipline
Paterson said “the management team continues to exercise strong financial discipline” to ensure Eroad can achieve positive free cash flow by the year ending March 2026 and that “we are acutely aware of the need to be judicious when investing shareholder capital.”
So the board apparently didn’t think Eroad needed more capital then, even though some, notably Craigs Investment Partners analyst Joshua Dale, who commented about Eroad's “elevated debt levels,” clearly thought it needed more equity.
But in March, Warrington said the company's operating model had it “staying within our debt limit of the $90 million.”
Both Warrington and Paterson denied that Eroad’s banks had been applying pressure on the company, and that it was the company that approached the banks to renegotiate its facilities, not the other way round.
But it's interesting that its banking facilities are now $10 million less than before – the $30 million term debt and $60 million revolving credit facility had been set to fall due in March 2025, but the company now has a $25 million term debt and $55 million revolving credit facility with the term extended to September 2026.
Warrington says the company raised enough cash that it doesn't need such large facilities on standby anymore, “which incurs a line fee charge to maintain. Given we forecast to be generating cash sometime in full-year 2025, it makes sense to reduce their size and maintain the flexibility to pay them down in the future.”
What was the tearing hurry?
It's also extremely difficult to fathom why the directors chose to use an accelerated renounceable entitlement offer (AREO), rather than a more conventional rights issue, not to mention the deep 49.6% discount to the last trade ahead of the capital raising announcement of $1.39.
I mean, what was the tearing hurry if the only reason the funds were needed was “to repay debt, providing funding headroom to allow Eroad to further underpin its growth strategy, especially in the key North American market,” which is what Eroad said the money would be used for.
The fact that Volaris opted not to participate in the capital raising, meaning its 18.7% stake will be diluted, is a pretty loud statement of a lack of confidence in the Eroad board.
In fact, Volaris put out a statement that made many of the same points I've just made – the executive leading the bid just returned to Australia from the US yesterday and wasn't available, but did forward the statement.
Paterson says she had a number of discussions with Volaris after the AGM and had impressed on it that “we did say we were not going to sit around in a hiatus” while a potential takeover bid hovered in the wings.
Interestingly, Paterson says Eroad is having ongoing discussions with “two to three strategic partners” that have to remain confidential at the moment but “they're not mutually exclusive.”
She had hoped to be able to tell the AGM about them but “we don't have anything signed and sealed.”
One wonders what those “two or three” parties think of the capital raising circumstances.
No premium
But it wasn't such a surprise that the auction of rights not taken up by the institutional holders, including Volaris and company founder Steven Newman, achieved no premium above the underwritten price of 70 cents per share.
In all, existing institutional shareholders coughed up for just $4.3 million of new shares, leaving $13.3 million to be auctioned.
Eroad hasn't said how many shares underwriters Goldman Sachs and Canaccord Genuity were left holding.
And it probably helps to explain why Eroad shares traded as low as 68 cents yesterday on NZX – the theoretical ex-rights price of Eroad shares was supposed to be $1.12.
None of this augurs well for the retail component of the AREO which closes on Thursday with any shortfall to be auctioned on Tuesday, Sept 26.
Paterson insists there was no tearing hurry to raise the new capital and that nothing material happened in the five weeks between the AGM and the capital raising announcement.
“We've been looking at the capital structure for about six months – that was something we started way before the Volaris offer,” she says.
Then why give the impression at the AGM that Eroad had sufficient capital?
We had enough money, she said
“We did have sufficient funds going forward, but we would have been constrained if we had landed some good prospects,” she says.
But again, what was the hurry that such a deeply discounted AREO was used to raise the funds? That just smacks of desperation.
“There wasn't any hurry. We just felt it was important to get on and get the capital structure reorganised, and focus on running the business.”
As for that deep discount: “I do agree on the face of it, it's difficult to reconcile” the pricing of the Volaris offer and the capital raising price. But the Volaris offer was for 100% of the company, not a portfolio holding, she says.
“We did a very detailed valuation model” before turning Volaris down.
The board had wanted to price the new shares “at a price we felt incentivised our shareholders to participate in the offer,” Paterson says, and calls the deep discount “reasonable,” particularly since it was about where the shares had been trading before Volaris burst on the scene.
Indeed, back on June 8, NZX's regulatory arm, NZ Regco, had queried the company on the rise in its share price from 57 cents on May 25 to 87 cents just after midday on June 8.
“Unsatisfactory” share price
Volaris has since lodged notices showing it began building its stake on May 30 and announced the bulk of it on June 22, and the share price that day rose from 77 cents to $1.23 and continued to rise to as much as $1.46.
Which casts Paterson's comments at the AGM in a rather ironic light: “It is important to acknowledge that Eroad's share price performance has been unsatisfactory over the past year, for reasons related to the market but also of our own making,” she said.
“The board has been acutely aware of this, but firmly believes that with the hard work largely done, our strategic plan in place and, given where we are along our path towards reaching positive free cash flow, we are now at the point where shareholders will start to reap the rewards.”
Long-term shareholders probably have great difficulty reconciling today's market pricing with the peak price of $6.77 back in July 2021. That's according to Yahoo Finance, and looks like it wasn't adjusted for the last capital raising – the NZ Shareholders' Association put the high in July 2021 at “close to” $5.70 ahead of Eroad's $167.3 million purchase of Cortex that same month.
The $84.4 million capital raising used to help pay for that acquisition was at $5.58 per share, a far cry from the current share price.
I still don't understand what prompted such a radical change in five short weeks ahead of the latest capital raising and why that meant the price of the new shares had to be at such a deep discount or why it was necessary to raise the funds so fast.
Absent a better explanation, it doesn't look like rational behaviour to me.
POSTSCRIPT: Late yesterday, Paterson texted me the following (I’ve corrected the grammar and spelling): “Reflecting on your questions, we are a great NZ company delivering unbelievable value to our clients and the world. Yes, there may be capital-raising events to provide certainty for future growth. But replacing debt for equity to give us headroom is a positive thing. It would be good if some informed commentators could provide understanding views. We are absolutely doing the right thing by the company and always will do. It’s unfortunate many commentators, who aren’t ‘in the ring’' trying to create value, are just wanting to throw stones.”
I’ll let readers judge for themselves.