Cartrack is a terrific business in my opinion.
I’ve written before in detail about why it’s so strong, but in summary:
- Combination of B2B (fleet management and asset recovery) and B2C (asset recovery) models with a diversified client base
- Exceptional operating margins thanks to its software-as-a-service (SaaS) model which becomes very juicy as scale is achieved
- Strong growth in Europe and Asia Pacific to complement the mature South African business
- 98% of revenue is subscription-based
- 43% operating cash conversion rate
Cartrack is well on its way to becoming a global powerhouse with a SaaS model which is all the rage currently.
There have been two issues hampering the company’s growth:
- Illiquid shareholder register (nearly 80% of the shares are held by entities linked to directors)
- International shareholders aren’t noticing Cartrack with its JSE listing and lack of volume traded
When I wrote the last article in October, I noted that I was considering taking a position. I subsequently did so, with an average purchase price of R45.49 per share. I also noted that the company was trading under cautionary and I speculated as follows:
“Karoo Pte Ltd is the Singaporean holding company linked to founder and CEO, Zak Calisto. Is he thinking of taking the company private? Or is there some other capital markets transaction being planned that might include an offshore listing?”
Well, the speculation is over. An offshore listing is on the cards. At first glance the announcement is very depressing, with an offer at only R42 per share! Let’s take a closer look.
We need to learn some jargon here first
A scheme of arrangement, often just called a scheme for short, is a corporate transaction proposed by the board of directors to the shareholders. It can be used, for example, to execute a buyout offer and delisting.
It’s very important to understand that the board must propose the scheme i.e. must agree with the transaction. This means that hostile takeovers cannot be implemented by a scheme of arrangement. They must be implemented by an offer directly to shareholders.
This isn’t a hostile takeover, but it was worth mentioning so you understand the difference. This is a friendly offer. It’s so friendly in fact, that the offer is being made by the CEO’s investment company.
A firm intention announcement, which is what Cartrack has now issued, is an announcement with all the details of the proposed transaction. It comes after a cautionary announcement, which warns people like me that I’m buying the share at own risk because a deal of some type is being considered.
Importantly, you cannot issue a firm intention announcement unless the offeror has proven to the Takeover Regulation Panel that the funds are available. This is to protect shareholders from wild announcements being released into the market that cannot be implemented.
So, there’s a cash offer
The price for the cash offer is R42 per share. That was a few bucks below the traded price, but then Cartrack closed at a whopping R51.50 per share, up 7.29% for the day.
Why on earth would the share price close far above the offer price?
The secret is in the reinvestment option (see below). Although there could be over R4bn flowing to shareholders who elect to ride off into the sunset, many will elect to stay.
In fact, of the 95.5 million shares in issue that are eligible for this scheme, 76.6 million have already provided an “irrevocable undertaking” to accept the reinvestment offer. This means that the offeror only needed to prove access to nearly R790m in funds, rather than over R4bn.
An irrevocable undertaking is the insurance policy of corporate finance deals. You approach selected large shareholders before the time and ask if they will support a deal. At that point, they become insiders and cannot trade their shares or buy more, as they have inside information.
For reasons I’ll never understand, Karoo Pte Ltd has now been renamed Karooooo Pte Ltd. Karoo with all the o’s will be making the offer to Cartrack shareholders. It will then list on the Nasdaq as the owner of all the Cartrack shares it acquired from shareholders.
Shareholders who sold their shares will have the option to reinvest the money received back into Karooooooooooooooooooo, subject to certain conditions.
In plain English: if you’re a Cartrack shareholder on the date the scheme becomes effective (if approved), you’ll be able to invest your funds into the new entity and participate in the global growth story that will be achieved through a listing on the Nasdaq in New York.
The company will inward list on the JSE, so you won’t even have to utilise your foreign investment allowance to do so. If institutions can get their hands on enough shares, they should back Cartrack as a brilliant Rand hedge of the future.
This is a huge move for the company.
Why are they doing this?
Simply, the thesis is that a Nasdaq listing will enable the company to reach its full potential. Personally, I couldn’t agree more.
Global shareholders can back a growth story in jurisdictions they understand: Europe, Asia Pacific and who knows where else in future. They will pay developed market multiples for this, which are typically higher than multiples paid for South African companies.
I love this company and I love this deal. I will wait for the full circular and prospectus of course and it brings a wonderful opportunity for explaining concepts in corporate finance deals to readers of The Finance Ghost, but I will almost certainly accept the offer to reinvest in the new company.
Onwards and upwards for this homegrown business, provided the scheme is fully implemented!