Blake Corbet is a Managing Director at PI Financial and Head of the Technology and Healthcare Investment Banking Group. He is also the advisor to Nuri Telecom on its bid for Apivio Systems.
Determining the value of anything can be difficult. It is a subjective thing with a few mathematical tools thrown in to make it seem more scientific. But a famous and often repeated quote captures the essence of valuation: “An asset is worth what a buyer is willing to pay for it.” If you don’t have a buyer, the asset only has a valuation in theory. In the presence of many buyers the asset has a greater value; possibly greater even than its theoretical value. But with a single buyer, that same asset is only ever worth what that buyer is willing to pay for it.
Apivio has only one buyer.
As for background, after many attempts at negotiating a friendly transaction with Apivio, on January 17th, Nuri Telecom, a Korean publicly-listed company with a market capitalization of approximately $125 million, made an unsolicited bid for TSXV-listed Apivio Systems for $0.40 per share. This bid by Nuri is an all-cash offer for 100% of Apivio subject to a minimum of 67%. It represents a 51% premium to Apivio’s share price the day before the bid and a 49% premium to the 30 day volume weighted average share price. Further details of the bid are contained in a circular mailed to all shareholders and filed on www.sedar.com.
Apivio’s board has struck a Special Committee that is “commencing a process to solicit potential alternative transactions”. Today, however, the only interested party is Nuri Telecom and it has been working on it’s bid for months, involving negotiations with Apivio, its board and advisor.
When you look at the hard facts, the $0.40 bid represents an enterprise value of approximately $22 million for Apivio, which implies a price-earnings ratio of almost 42x Apivio’s earnings per share of $0.01, and approximately 13x Apivio’s Adjusted EBITDA, based on Apivio’s Latest Twelve Months of publicly filed financial information (Q4, 2015 – Q3, 2016 inclusive).
Nuri believes its all-cash bid is even more attractive when viewed against the risks inherent in Apivio’s long term business plan and its recent anaemic stock performance. The Apivio board and management team have presided over a share price decline of approximately 40% over the year prior to Nuri’s bid, which represents a loss of approximately $9-million in equity value from its highest point on February 3, 2016. Moreover, Apivio’s financial health is dependent on its wholly-owned Korean subsidiary, Moimstone, which generates approximately 95% of Apivio’s overall revenues over the 2014 and 2015 fiscal years. Apivio’s performance in North America, independent of Moimstone, has been flat, with its major sales to date consisting of a $2.6 million contract for the UT880 Monet series VoIP phone and a $0.2 million contract for the Wi-Fi liberty series, Liberty L1 product, in 2015. To put these numbers in perspective, Apivio spent essentially all of the revenue from these two products on R&D and North American marketing expenses with basically nothing to show for it.
To find a competing bid, one would have to uncover a company that is looking for a telecom hardware business in Korea with 18% Gross Margins and a 10% growth rate. Apivio’s deal with NEC and their WiFi phone generate essentially no revenue so an incoming buyer will put little if any value on those products. The best buyer must be one that operates in Korea, can capture cost synergies by integrating the business with existing operations, and is willing to put in months of time, effort and expense to buy an asset worth $20 million.
Moreover, if there was another company in Korea that might be interested in Apivio, why would the founder of Apivio, Korean resident CW Lee, have chosen to sign a lock up and support agreement with Nuri?
The fact that almost 20% of Apivio’s total shares outstanding have changed hands since Nuri’s bid was announced means many fatigued shareholders are voting with their feet and selling now. The buyers in these situations tend to be hedge or arbitrage funds that own the shares solely to tender them for cash.
Apivio’s board has few options and the more time that passes the lower will be the value of the company. There really is only one choice.