What's next for Procurri after aborted asset sale?
PROCURRI shares went on a roller-coaster ride over the past two months as initial excitement over a possible offer turned to doubts. Last week, the ride fizzled out after data centre support services specialist Park Place Technologies decided that it no longer wants to acquire Procurri's third-party hardware maintenance business.
(It's called third-party maintenance because Procurri helps customers service servers and storage equipment that's no longer covered by a warranty from the original equipment manufacturers.)
Deal talks had begun in November with Park Place making an indicative cash offer of US$115 million or S$0.55 per share for all of the assets that comprise Procurri's third-party hardware maintenance business, subject to due diligence.
But Park Place and Procurri were "unable to agree on the final price and structure of the proposed acquisition", said Procurri last week.
It's not clear if Park Place changed its mind after further exploration or if Procurri had wanted to extract more from Park Place than it was willing to pay.
What's certain is that carving Procurri's business up to be sold in parts would be counter to the strategy that management has articulated many times before.
That is to use the customer relationships that Procurri has established in its hardware resale and third-party maintenance businesses to cross-sell and build on Procurri's IT asset disposition capability. (IT asset disposition, or ITAD, is about refurbishing or disposing of customers' hardware, including the secure erasure of data.)
Selling the third-party maintenance business would also mean losing the single largest contributor to Procurri's group earnings.
Which could explain why some have interpreted these conversations as a lack of confidence in Procurri's future, though the company told The Business Times that this is not the case. "If a credible offer comes from a serious party and valuations are reasonable then it's the obligation of the board and company to seriously consider and analyse whether it's in the best interest of shareholders," it said.
In any case, Procurri shares have fallen back to S$0.345 after climbing to a peak of S$0.495 on Dec 26.
That's just a shade higher than S$0.33, which is what the owners of private equity firm Novo Tellus paid last March for a 29.6 per cent stake in the firm.
Since then, group revenue has slipped 2 per cent to S$165 million in the first nine months of 2019 compared with the same period a year earlier, while pre-tax profit is down 36 per cent at S$5 million.
As buyout speculation blows over, attention has returned to Procurri's growing pains. One question is whether Novo Tellus has the operational expertise to provide Procurri with the help that it needs.
For instance, Procurri bought full control of US joint venture company Rockland Congruity last April in a move to bulk up its third-party maintenance business, but integration has been far from smooth.
Modifications to Rockland's inventory platform and processes resulted in erroneous purchase orders that overstated Procurri's gross profit by S$629,000 in the quarter ended June 30 last year. Management realised the error last month and published revised financial statements.
More importantly, Procurri didn't have the staff strength or the systems required to support the higher business volumes that Rockland was bringing in-house.
While this is probably a good problem to have, serious service delivery issues could also put Procurri in a vulnerable position with customers. To solve the issues, Procurri has made a bunch of new hires and is currently undergoing a system revamp. The integration is about 80 per cent complete as of now, chief financial officer Vincent Choo told BT on Monday.
The group also hopes to get customer satisfaction and other operating metrics (eg. the average time to resolve open tickets) back to historical levels by the end of the first quarter this year.
Last year was supposed to be the year that Procurri focused on growing its newer ITAD business but it may be better remembered as a year of missed opportunities instead.
The good news is that consolidation in the hardware lifecycle services industry continues to make Procurri an attractive privatisation target.
That said, Procurri would probably not have been on the radar of investors if not for the fact that Novo Tellus had put its skin in the game. But it's still not clear where they are going with this bet.
