It’s had a rough couple of years, but Echelon Wealth Partners analyst Ralph Garcea thinks there is now significant upside in Redknee Solutions (TSX:RKN).
Yesterday, Redknee announced it had entered into a fully-backed rights offering that would see it raise a minimum of (U.S.) $54-million. Management said the capital would help it accelerate its existing strategic plan.
“This transaction is a crucial milestone in our journey to create the one Redknee way. We have to refocus our efforts and ensure that we make our customers successful, in turn, making Redknee successful,” said CEO Danielle Royston. “The capital we raise from this offering will enable us to invest in key areas of the business such as delivering success to our customers, reskilling critical teams, hiring top talent and removing inefficiencies. We look forward to rebuilding Redknee.”
Garcea today outlined the details of the transaction.
“ESW Capital had put forth two dilutive proposals involving rights offerings in order to fund RKN’s strategic objectives,” he explained. “RKN announced that it has chosen the offer to raise a minimum of $54M at $0.50, fully backstopped by ESW. Concurrent to the aforementioned, RKN will be entering into services agreements with ESW Capital affiliates Crossover Markets and DevFactory. Crossover Markets not only connects companies to the best talent from around the world in an effort to localise staffing, but also provides a seamless end-to-end solution for remote team management. DevFactory brings manufacturing principles to large-scale software services, guaranteeing high quality work at half the cost, and emerged from the engineering group of Trilogy Inc., one of the largest privately held software companies in the world. As part of the transaction, ESW will be granted 2.5M warrants at $0.50. ESW’s total ownership will increase from 13% to 56% if the proposed transaction goes according to plan. A special meeting of shareholders will be held to approve the proposed transaction, with a majority of the minority shareholders (excluding ESW and affiliated) needed to move forward.”
“We believe ESW will exit the RKN trade in 24-36 months with at least a double, given where takeout valuations are in the Enterprise Software sector,” he said.
In a research update to clients today, Garcea maintained his “Speculative Buy” rating and one-year price target pf $1.50 on Redknee, implying a return of 99 per cent at the time of publication.
Garcea thinks Redknee will post Adjusted EBITDA of $3.3-million on revenue of $135.7-million in fiscal 2017. He expects these numbers will fall to EBITDA of $1.8-million on a topline of $134.9-million the following year.