Eroad seeks $50m in deeply discounted offer

Eroad is offering shares at a 49.6 per cent discount.

Having apparently beaten off a takeover attempt by Canadian investor Constellation Software in July, Eroad is offering shares at 70 cents each, a 49.6 per cent discount to yesterday’s closing price of $1.39 and a 37.7 per cent discount to the theoretical post-offer price of NZ$1.12.

“The net proceeds from the equity raise will be used to repay debt, providing funding headroom to allow Eroad to further underpin its growth strategy, especially in the key North American market,” chair Susan Paterson said in a statement to the NZX.

However, Constellation vehicle Volaris announced it would not participate, questioning why it would raise capital at 70c a share when the Eroad board claimed a takeover offer at $1.30 a share “materially undervalued” the company.

“We question why Eroad would offer such a deep discount to incentivise participating in this capital raise. We question the urgency, need and terms of this capital raise,” Constellation/Volaris said in a statement that implies the intention of the raise is to dilute its 18.8 per cent stake.

Eligible retail shareholders will have until 7pm on Thursday, September 21, to subscribe for new shares in an entitlement offer comprising four elements: an accelerated institutional entitlement offer, an institutional bookbuild, a retail entitlement offer and a retail bookbuild.

The institutional component of the raise is to total $11.6 million while the renounceable rights issue will raise a further $38.4m. The raise is fully underwritten by Goldman Sachs NZ and Canaccord Genuity (Australia).

The net proceeds will increase Eroad’s funds available to about $65m and reduce net leverage from 1.6 times to 0.4 times in the 2023 financial year, the company said in a presentation to investors.

Eroad is in what it says is a turnaround phase, having identified $10m of annual savings in the last financial year and some $7.5m for the 2024 financial year, identified for a second $10m of savings and plans to be cashflow positive in the 2025 financial year.

In late June, BusinessDesk reported that Eroad’s monthly cash burn was about $1.8m and that it had 15 months of headroom before running out of cash, given its commitment not to go above a $90m debt facility. Today’s investor presentation says that facility has been replaced with a new $80m three-year debt package, with Kiwibank joining the consortium already involving BNZ and ANZ and reducing to $60m by the end of the term.

Eroad recorded losses of $7.2m and $5.1m over the last two financial years as it followed the typical software-as-a-service company’s model to grow revenues and scale prior to profitability.

However, Eroad’s share price suffered a double whammy as SaaS firms fell out of favour after the post-pandemic downturn in global equities and the unexplained departure of co-founder Steve Newman in April last year.

Having raised capital to buy NZ software firm Coretex for $177m as part of its strategy to seek beachheads in the US market, Eroad’s share price had sunk from an all-time high of $6.77 in July 2021 to trade below $1 before Christmas last year. It had sunk to 64c by the time it announced its results for the year to March 31 this year.

When Constellation built its 17.74 per cent in May and June this year, it paid 77c per share for the first tranche and an average $1.30 for the second.

Its bid for Eroad, which had employed Goldman Sachs to undertake an international search for partners, valued the company at $147m.

In its presentation today, Eroad reiterated its previous earnings guidance, saying it anticipated “normalised” earnings before interest and tax to be between zero and $5m.

All current directors indicated they would take up their full entitlements under the offer, with new shares allotted becoming tradeable on the NZX from October 2 and the ASX from October 3.