Some fund managers invested in Pushpay say BGH Capital and Sixth Street’s $1.54 billion takeover offer undervalues the maker of church donation and management software.
In April, when talk of a potential takevover first emerged, Jarden analyst Guy Hooper noted that while data was scarce in the sector, recent transactions - including a November deal that saw New York-based investment firm Reverence Capital Partners take a majority investment in church management software provider Ministry Brands - had occurred at an average multiple of 6.2x sales, implying that Pushpay could be valued at up to $2b in a takeover, or a 25 per cent premium on its market cap at the time.
The BGH/Sixth Street $1.34 per share offer revealed on October 31 represented a 13 per cent premium on Pushpay’s price at the time (the shares were recently trading on the NZX at $1.28).
Soon after Pushpay reported its first-half numbers this morning - confirming its downgraded guidance - the Herald asked chief executive Molly Matthews for her reaction to comments that $1.54b was too cheap.
“Having had the benefit of walking through the process with our board of directors, one of the things that was very important to them is that they are using real-time information from the market [and] understanding that the cost of capital has changed, and the trading environment has changed,” the CEO said.
Interest rates have shot up, and private equity players are suddenly finding it harder to raise funds - and when they do, they’re driving harder bargains.
The board had felt obliged to put the BHG/Sixth Street offer to shareholders, who would do their own due diligence. A vote on the $1.34 per share offer is expected in the new year.
Matthews said Pushpay faced short-term problems that it could or had already resolved, including the fact it had taken longer than anticipated to “reset” its go-to-market team and install new hires.
“Longer term, there are things in the economy that are outside of our control. Across all US churches, they’re seeing a lower number of new donors coming into the ecosystem. That’s something that we deeply desire to influence, but we don’t have a tremendous amount of control over.”
Why are fewer new people giving money to churches?
“The environment in the US right now, and honestly for the last two years has been quite volatile - culturally, politically and economically,” Matthews said.
“I think that people are making different choices of how to spend their free time. I do believe that that will turn around. But when that turnaround takes place is anyone’s guess at this point.”
On a conference call with analysts, Pushpay CFO Richard Keys addressed the more general issues generated by high inflation and rising interest rates. Churches saw the potential of digital solutions to help address higher costs, but the economic pressures had also “elongated” decision-making cycles around purchasing software.
Earlier today, as it reported its first-half 2023 result, Pushpay pushed-out two of its big hairy goals for 2025.
The firm said it would still hit its targets of 20,000 customers and US$10 billion in total processing volume.
But it will now take 12 to 18 months longer “on the basis that the current trends improve”.
The admission was made as the NZX-listed Kiwi-American firm posted its first-half numbers, which were in line with an October 31 guidance update.
It also came against the backdrop of a $1.54b takeover offer that will be voted on in the New Year, and divided analyst opinion over whether a rival bidder could enter the fray.
CFO Keys said on a conference call with analysts that Sixth Street and BGH Capital’s $1.54b offer could not be lowered, and that in any case, the pair had seen Pushpay’s final numbers - including its pushed-out FY2025 targets - under non-disclosure before entering the scheme of arrangement on October 31.
Pushpay said underlying ebitdaf fell 10 per cent to US$27m based on costs of its early push into the Catholic segment (so far, nearly all of the Kiwi American firm’s revenue has come from Protestant churches).
Net profit fell 54 per cent from US$29.6m to US$8.8m.
First-half revenue was up 10 per cent to US$103m based on Pushpay’s acquisition of streaming platform Resi Media.
Adjusting for Resi, revenue was “flat to down”, Jarden analyst Guy Hooper said, representing a second slow northern summer in a row.
Pushpay also said underlying earnings would fall 10 per cent to US$27m based on the costs of its early push into the Catholic segment. So far, nearly all of the Kiwi-American firm’s revenue has come from Protestant churches.
Total processing volume increased to US$3.6 billion, up 2 per cent on the first half of last year as total customer numbers increased 4 per cent to 14,602.
The softer guidance given in the October 31 update was also confirmed.
Pushpay said it now expects underlying ebitdaf to be at the lower end of its original FY2023 guidance of US$56m-US$61m. It is now forecasting underlying between US$54 and $58m.
And its revenue growth guidance has been cut from 10 to 15 per cent to 4 to 8 per cent.
Matthews said that churches were under pressure from increasing inflation, labour costs and interest rates.
Keys said while congregations were looking to technology to help cut running costs, the economic pressures also meant that purchasing decisions were being pushed out.
UBS analyst Phil Campbell noted that churn had increased among mid-size churches.
Pushpay has also closed a couple of large deals recently, with the Archdiocese of Seattle and the US Army Chaplain Corps, a public service organisation that services over one million active, reserve and retired US soldiers - a deal that Hooper says is worth $4m and more importantly “marks a push into public service organisations and a potentially meaningful expansion of the total-addressable market”.
Matthews said the Catholic segment, non-profits and the public sector would be future areas of growth, and to expand beyond
Forsyth Barr analysts Andy Bowley and Mark Robertson warn that Pushpay faces cheaper competitors in new markets, however.
Matthews said competition varied by market and territory.
Pushpay was seeing a lot of inbound interest from non-profits and public service organisations, Matthews said. The US Army Chaplain Corps had approached Pushpay, wanting to use its software. The CEO also saw future expansion out of the US - which accounts for nearly all revenue today - into Spanish-speaking and South East Asian countries.
Earlier this year - before the takeover offer - Pushpay said it planned to transfer its intellectual property from a New Zealand Pushpay subsidiary to a US Pushpay subsidiary. It has requested a binding ruling from Inland Revenue.
Today, it Matthews updated that Pushpay had gained IRD and banking approval for the move - but it was now on hold pending the outcome of the takeover vote.
If it did go ahead, the deal would lower Pushpay’s tax expenses, due to the different tax treatment of intellectual property in the US. It had no bearing on a possible Nasdaq listing, which was off the table for now.
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