DeClout says no plan for now to mount counter offer for Procurri

Singapore

TECHNOLOGY incubator DeClout said it has no plans at the moment to mount a counter offer for Procurri, but is keeping all options on the table. It is also not in talks with the other five parties that have similarly voiced their intention to vote against the offer by private equity firm Novo Tellus for 51 per cent of Procurri at S$0.365 per share.

Speaking to The Business Times, DeClout chairman and group chief executive officer (CEO) Vesmond Wong said they are not coordinating their actions, but "these shareholders have been with us for a long time, so I guess they understand the value of Procurri".

He added that he would also prefer a full offer to a partial offer, as he hopes to work with Novo Tellus and Procurri's management team to improve the company's performance.

After its latest share purchases on Tuesday, it owns about 21.7 per cent of Procurri. DeClout has not had such discussions with Procurri's management or Novo Tellus since selling a 12.75 per cent stake in Procurri to Novo Tellus in February 2019.

Mr Wong said he understands Procurri's business well, since the provider of data centre equipment and lifecycle services was spun off from DeClout onto the mainboard at S$0.56 per share in 2016.

"I guess from our position, if we cannot contribute and cannot do anything (once Novo Tellus holds a controlling 51-per-cent stake), then we'd rather sell everything. That would be a much easier decision for us," he said. A fair price to him would be "at least 42 cents, 45 cents", he said, as it includes a control premium that Novo Tellus will be assuming.

Procurri shares have never traded at the initial public offering (IPO) price since the day they listed. Their all-time peak was S$0.54 in Sept 2016, before a steep decline shortly after as the company made losses in FY17 due to higher expenses. They next peaked at S$0.495 in December 2019, before Covid-19 dealt a blow to their share price again.

Mr Wong pointed to an incident in November 2019 when Procurri accepted a letter of intent from third-party data centre maintenance firm Park Place Technologies for its hardware maintenance business for US$115 million or S$0.55 per share. The deal did not go through in the end for undisclosed reasons.

For context, Procurri has two business segments. One is IT distribution, where it buys used enterprise hardware from the market and sells them to end-users, which used to be companies, but are increasingly becoming data centres as firms ditch hardware storage for cloud services on demand from data centres.

The second segment, called lifecycle services, is its maintenance service where it helps to maintain the equipment after they have reached the end of service life with their original equipment manufacturers. Data centres only need computing power and storage capacity to fulfil their services to customers, so they do not require new or the latest equipment.

In FY20, the second segment contributed a third of Procurri's revenue but more than half its gross profit due to its higher gross profit margin of almost 46 per cent.

Mr Wong attributes part of the shares' undervaluation to investors' lack of understanding in the company's business. Within the industry, he cited the example of Park Place acquiring Curvature last year to become the largest global provider of third-party data centre maintenance. While the consideration was undisclosed, Park Place later raised a US$845 million loan to finance the acquisition and refinance debt.

This follows the merger between Curvature and Systems Maintenance Services, both of which are third-party IT services vendors, to form a US$500 million entity in 2017. Mr Wong therefore agrees with the offeror that Procurri needs large investments to generate future growth.

"Acquisition must be on the cards to grow the size of the company," he said. Procurri has a market cap of S$106 million as at Wednesday.

The offeror has said that its intent in rolling out a partial offer is to allow shareholders to cash out partially. Their remaining shares will allow them to participate in the company's future financial performance.

Keith Toh, partner of Novo Tellus and director of the offeror, added that the decision to launch a partial offer was because "we think there's long-term value at the company, despite short-term difficulties that need strategic investment".

"We wanted to provide shareholders a choice to participate in the long-term value or cash out today for a meaningful premium. But we are also satisfied with shareholders who choose to hold their shares: we too are believers in the long-term value of Procurri."

The offeror also plans to work with the board to do a strategic review of its businesses to create "sustainable value" for shareholders, although it also warned that this may take several years.

ICH Gemini, another investor which has said it will vote against the offer, also told BT that it was not working together with DeClout, but had its own reasons for thinking the offer price was too low, as it had bought into the stock at IPO. Director of ICH Gemini Vincent Toe said: "It is not because DeClout tried to garner support from others. I have my independent views. I work for my LPs (limited partners), not DeClout."

He pointed to Procurri's improving topline (although its net profit has remained stagnant at single-digit millions, except for a slight loss in FY17) and the buoyant equity market this year as reasons why he feels the offer is not fair to minorities. He would like a strategic review to be conducted now, so that the company can find ways to unlock value and perhaps allow other potential bidders to enter.

"This process is such a short process and we are only given one option, which is not a very attractive price, so I thought the best way is to put it down and review what's next for the company. We hope that through a strategic review, more parties will emerge and offer an alternative for the minorities," he said.

"One way could be a partial sale of the business like before, or even M&A (merger and acquisition) to make it a more complete operation. In such a review, we should leave all stones unturned in trying to uncover value instead of just pursuing a very easy way out."

It has become increasingly challenging for Novo Tellus to gather the shares it needs to push the offer through. It requires half the independent shareholders (who make up about 71.1 per cent of the shareholder base) to vote in favour of the offer. With DeClout's latest share purchase, 34.38 per cent are already voting against.