Procurri Corporation

[psnijders]

There have been some major developments at Procurri in the last couple of weeks.

- Last week the company announced that they "in recent months received non-binding indications of interest from several third parties for the purchase of certain assets of the Company and its subsidiaries": https://links.sgx.com/1.0.0/corporate-an...c160bb56b9

In light of Park Place's offer from 2019 that I mentioned in my previous post, this looks like a very interesting development. Is there again interest in the company's Third Party Maintenance (TPM) division? And will it lead to a definite transaction this time? If a sale of a division takes place while minority holders are still at the table alongside Novo Tellus and DeClout, this seems quite positive. My worry was that Novo Tellus / DeClout would attempt to buy out minorities at a low price first.

- Today a filing was released that showed very large insider buys by DeClout: https://links.sgx.com/1.0.0/corporate-an...3dd50656ce.
They bought 12.2m shares in recent days, taking their stake from ~22.0% to 26.1% of the outstanding shares. I was a bit surprised that DeClout is allowed to buy during a time when there are ongoing discussions with third parties, since DeClout is also on Procurri's Board of Directors. But to see them buying so aggressively at these prices IMO clearly shows that they see a lot of value here.

The downside for minorities is that DeClout's buys further secures Novo Tellus' and DeClout's position as the controlling shareholders. Overall, I'd say these latest developments are quite positive though.

[psnijders]

DeClout launched a mandatory conditional cash offer today at a price of $0.425: https://links.sgx.com/1.0.0/corporate-an...cf3baed11e. This offer was triggered because they went over 30% ownership.

Novo Tellus is not among the concerting parties in this offer. DeClout mentions it wants to maintain Procurri's listing status. That is obvious, because there's no way they can get over 90% acceptances without Novo Tellus' accepting the offer.

I'm a bit confused about whether DeClout was among the "third parties" the company mentioned in its earlier announcement of May 12 about the non-binding indications of interest. Or did DeClout get the idea of buying more shares *after* they read this announcement?

I noticed that the request for a trading halt was filed after the offer announcement from DeClout, perhaps that means that the company itself will file a statement as well?

[psnijders]

The company just posted its own announcement about DeClout's offer as well: https://links.sgx.com/1.0.0/corporate-an...dc8a8ba63f.

On page 1 it discloses that CEO Thomas Sean Murphy sold his entire stake to DeClout today. As a reminder, Murphy agreed to the failed lowball offer of $0.365 per share from Novo Tellus in 2021. Does that indicate that Novo Tellus perhaps agrees with DeClout's actions? Would Murphy do anything to upset Novo Tellus?

I think shareholders should keep strongly in mind that a true third party, Park Place Technologies, made a USD $115m (~SGD $155m) offer in 2019 for just the third party maintenance (TPM) division! See: https://www.businesstimes.com.sg/compani...iness-unit. DeClout's $0.425 per share offer only translates to a ~SGD $126m market cap. Why sell to DeClout for a price that probably still falls well short of the true value of just the TPM business?

Of course, Procurri has another valuable and growing division called "Hardware, Lifecycle Services and IT Asset Disposition", further enlarging the discount between this offer and the intrinsic value of the company.

The independent financial adviser (IFA) will make a recommendation to the Board about DeClout's offer within 14 days. In my opinion, any recommendation that is based on NAV, or a P/E ratio should be dismissed by shareholders. NAV and a P/E ratio are what the IFA used in Novo Tellus' lowball partial offer in 2021 of $0.365.

Please see my previous post about the reclassification of maintenance parts and how this has depressed earnings and NAV in the last couple of years. That clearly shows that Procurri's NAV or a P/E ratio do not reflect the true value of the business.

The IFA's recommendation should instead focus on:

• Procurri's true earnings power
  
• and the value of the business to a true third party buyer like Park Place
  

- Procurri's true earnings power: this is reflected by the free cash flow that the business has generated over the last few years. Free cash flow can be calculated by taking "Net cash generated from operating activities" in the company's cash flow statement and deducting the capital expenditures, as reflected by the "Purchase of plant and equipment" in the cash flow statement. This number can fluctuate significantly from year to year, due to working capital movements, so it's important to look at a period of a few years to smooth these movements out. Of course growth should be taken into account as well by shareholders and the IFA, as Procurri is likely to grow these numbers in the future.

- The value to a third party buyer: Park Place's offer in 2019 is a good indication of the value of just the TPM segment. Park Place was, and is, a very credible buyer and is still very acquisitive today. The company recently mentioned several third parties had expressed interest in assets, so perhaps we'll learn more about that in the IFA's recommendation.

Sorry for the long post.   I just think minority shareholders should stick together and really look with a critical eye at DeClout's offer and any future offers. I have not sold a share and think Procurri's value well exceeds DeClout's offer.

[Shiyi]

The company just posted its own announcement about DeClout's offer as well: https://links.sgx.com/1.0.0/corporate-an...dc8a8ba63f.

On page 1 it discloses that CEO Thomas Sean Murphy sold his entire stake to DeClout today. As a reminder, Murphy agreed to the failed lowball offer of $0.365 per share from Novo Tellus in 2021. Does that indicate that Novo Tellus perhaps agrees with DeClout's actions? Would Murphy do anything to upset Novo Tellus?

I think shareholders should keep strongly in mind that a true third party, Park Place Technologies, made a USD $115m (~SGD $155m) offer in 2019 for just the third party maintenance (TPM) division! See: https://www.businesstimes.com.sg/compani...iness-unit. DeClout's $0.425 per share offer only translates to a ~SGD $126m market cap. Why sell to DeClout for a price that probably still falls well short of the true value of just the TPM business?

Of course, Procurri has another valuable and growing division called "Hardware, Lifecycle Services and IT Asset Disposition", further enlarging the discount between this offer and the intrinsic value of the company.

The independent financial adviser (IFA) will make a recommendation to the Board about DeClout's offer within 14 days. In my opinion, any recommendation that is based on NAV, or a P/E ratio should be dismissed by shareholders. NAV and a P/E ratio are what the IFA used in Novo Tellus' lowball partial offer in 2021 of $0.365.

Please see my previous post about the reclassification of maintenance parts and how this has depressed earnings and NAV in the last couple of years. That clearly shows that Procurri's NAV or a P/E ratio do not reflect the true value of the business.

The IFA's recommendation should instead focus on:

• Procurri's true earnings power
  
• and the value of the business to a true third party buyer like Park Place
  

- Procurri's true earnings power: this is reflected by the free cash flow that the business has generated over the last few years. Free cash flow can be calculated by taking "Net cash generated from operating activities" in the company's cash flow statement and deducting the capital expenditures, as reflected by the "Purchase of plant and equipment" in the cash flow statement. This number can fluctuate significantly from year to year, due to working capital movements, so it's important to look at a period of a few years to smooth these movements out. Of course growth should be taken into account as well by shareholders and the IFA, as Procurri is likely to grow these numbers in the future.

- The value to a third party buyer: Park Place's offer in 2019 is a good indication of the value of just the TPM segment. Park Place was, and is, a very credible buyer and is still very acquisitive today. The company recently mentioned several third parties had expressed interest in assets, so perhaps we'll learn more about that in the IFA's recommendation.

Sorry for the long post.   I just think minority shareholders should stick together and really look with a critical eye at DeClout's offer and any future offers. I have not sold a share and think Procurri's value well exceeds DeClout's offer.

Declout has collected more than 51% stake. The GO is a foregone conclusion regardless of IFA recommendations.

[psnijders]

Declout has collected more than 51% stake. The GO is a foregone conclusion regardless of IFA recommendations.

Nowhere in my post did I imply that the mandatory offer can be stopped. Since DeClout, as you pointed out, now holds ~50.8% of Procurri's maximum potential issued share capital, the 50%+ acceptance condition is now met.

The point of my post was to show that the price offered is IMO much too low. Shareholders are not required to accept DeClout's mandatory offer or sell their shares in the open market. They can continue to hold their shares. Some people will perhaps wait for the IFA's opinion to make up their mind, whether to accept or not. Well, then make sure the IFA is looking at the right metrics! Things like free cash flow and a previous offer by Park Place. Not things like earnings and NAV that were impacted by huge write-downs of reclassified inventory over the last few years. In my previous posts in this topic I described these issues in more detail.

Shareholders are allowed to hold their shares and not sell. DeClout has said it intends to maintain the listing status of the company.

But there is a minimum public float requirement in the SGX listing manual that is relevant for this offer. From page 6 of the offer announcement:

"Under Rule 724(1) of the Listing Manual, if the percentage of the Shares held in public hands falls below 10%, the Company must, as soon as practicable, announce that fact, and the SGX-ST may suspend trading of all the Shares. Rule 724(2) of the Listing Manual states that the SGX-ST may allow the Company a period of three (3) months, or such longer period as the SGX-ST may agree, to raise the percentage of the Shares held in public hands to at least 10%, failing which the Company may be removed from the Official List of the SGX-ST."

On page 135 of Procurri's annual report it is disclosed that "as at 22 March 2022, approximately 35.89% of the issued ordinary shares of the Company is held by the public as defined in the Listing Manual of the Singapore Exchange Securities Trading Limited".

Obviously that percentage will be lower now. I don't think we can find out the updated number currently.

So if shareholders want to maintain Procurri's public listing it is very important that they do not sell their shares to DeClout on the market or by accepting their offer.

[sumtt]

I've been holding a small position in Procurri since 2019 - as I see potential in the ITAD business, and the maintenance business. I've been tracking its financials and waiting for a turnaround. I also agree that DeClout's offer price is too low, and undervalues the company. 

However, if Sean Murphy is out, and if Novo Tellus were to also exit, then I don't see any point in holding on, with DeClout back in the drivers seat.

[ghchua]

The IFA's recommendation should instead focus on:

• Procurri's true earnings power
  
• and the value of the business to a true third party buyer like Park Place
  

I think you have misunderstood the scope of IFA in relation to takeover offers. IFA role had never been to express view on the future growth prospects, financial position or earnings potential of the company. That is the stock analyst role, not the IFA.

IFA role is also not to do valuation on the company. That is the role of a valuer, not an IFA.

I think you have to understand the scope of engagement of IFAs in takeover offers before we can even discuss further here.

[psnijders]

I think you have misunderstood the scope of IFA in relation to takeover offers. IFA role had never been to express view on the future growth prospects, financial position or earnings potential of the company. That is the stock analyst role, not the IFA.

IFA role is also not to do valuation on the company. That is the role of a valuer, not an IFA.

I think you have to understand the scope of engagement of IFAs in takeover offers before we can even discuss further here.

Fair enough. I've looked at last year's partial offer and I see that the IFA's job there was to advise the independent directors on the offer. They did calculate an "Estimated Theoretical Valuation Range" in that offer and also sometimes used phrases like "shareholders should note" in their letter. But I recognize their advice is not formally directed at shareholders. Also, I'm not sure if there are differences in the IFA's role between that offer (partial offer) and the current offer, because the current offer is a mandatory one.

I think I've made my point. Shareholders should make up their own minds about the offer. I've tried to give my perspective on it.

[Shiyi]

I think you have misunderstood the scope of IFA in relation to takeover offers. IFA role had never been to express view on the future growth prospects, financial position or earnings potential of the company. That is the stock analyst role, not the IFA.

IFA role is also not to do valuation on the company. That is the role of a valuer, not an IFA.

I think you have to understand the scope of engagement of IFAs in takeover offers before we can even discuss further here.

Fair enough. I've looked at last year's partial offer and I see that the IFA's job there was to advise the independent directors on the offer. They did calculate an "Estimated Theoretical Valuation Range" in that offer and also sometimes used phrases like "shareholders should note" in their letter. But I recognize their advice is not formally directed at shareholders. Also, I'm not sure if there are differences in the IFA's role between that offer (partial offer) and the current offer, because the current offer is a mandatory one.

I think I've made my point. Shareholders should make up their own minds about the offer. I've tried to give my perspective on it.

The "Estimated Theoretical Valuation Range" by the IFA at last year's partial offer is between $0.3253 and $0.4107. 

Based on this estimate, the IFA this time round is likely to recommend that the offer of $0.425 is "fair and reasonable".

[psnijders]

Novo Tellus tendered its entire stake to DeClout: https://links.sgx.com/1.0.0/corporate-an...770c6b94f0.

I was surprised to see NT tender their shares. Especially since they tried to increase their stake substantially just last year. I think this puts minority investors in a much worse position after the offer. 

I was confident that NT would be looking to monetize Procurri's assets over the next few years, but I can't say that about DeClout. It seems more likely they will own Procurri for the long term. That doesn't have to be bad for minority shareholders necessarily, but capital allocation is of course very important in that scenario. Since DeClout is under Japanese ownership and many Japanese companies have bad capital allocation policies (i.e. cash hoarding), it remains to be seen how this will develop at Procurri.

Those are my thoughts about NT's tender currently. It seems like a disappointing and negative development to me. I'm curious about what prompted NT to sell. Perhaps DeClout was not willing to go along with a sale of Procurri's assets (i.e. the TPM business).