Canadian monetization and customer service specialist Redknee Solutions Inc. got a temporary reprieve on debt covenant violations but faces other pressures now that two investors have taken substantial stakes in the company.
Cantor Fitzgerald & Co. analyst Ralph Garcea told The Deal, a sister publication of The Street, that Redknee's technology is finding large clients with long-term needs but that its financial performance hasn't impressed.
"An acquisition is likely to happen sooner rather than later," according to Garcea.
Lenders behind a $52.8 million credit facility recently waived some covenants for Redknee for the company's fiscal year, which ends Sept. 30, subject to compliance by Redknee with conditions and reporting relating to its review of strategic and financing alternatives.
Technology acquisition specialist ESW Capital LLC, an Austin, Texas, private equity firm, disclosed an 11.55% stake in an Aug. 8 early warning notice, which is the Canadian regulatory equivalent of a 13D filing with the Securities and Exchange Commission in the U.S.
The filing revealed no specific plans for Mississauga, Ontario-based Redknee, but ESW's basic mandate is to acquire, fix and manage software companies.
"Transactions are quick-turn and more importantly no nonsense," according to the company's website. "In many cases, 10 days to LOI (letter of intent), 45 days to close with no post-close contingencies."
ESW has acquired dozens of SaaS and IT companies since 1989, most recently bankrupt digital security firm Wave Systems Corp., enterprise mobile platform @hand Corp., and data warehouse Ignite Technologies.
Danville, Calif., activist firm Crescendo Partners LP, which has a lengthy track record of investing in Canada, revealed a stake in an Aug. 11 letter.
"We believe that many of the features that attracted us to Redknee will also attract numerous potential buyers, both strategic and financial, if the company decides to start a sales process," Crescendo said. "We believe that potential buyers would be interested in acquiring Redknee due to its strong brand reputation, valuable customer relationships, large backlog, discount to intrinsic value and opportunity to return to historical profitability."
Redknee said in a publicly disclosed letter on Aug. 11 that it was planning to meet with Crescendo, and the company formed a committee to review strategic alternatives, according to an Aug. 22 statement.
Crescendo didn't disclose the size of its stake, and Canadian regulators don't require disclosure for stakes of less than 10%.
Cantor Fitzgerald's Garcea noted that the two investors got in pretty recently after a couple of bad quarters led to a stock price fall, giving them a cost basis of around $1.70 per share. Recently the shares were trading around C$2.15, down from a 52-week high of C$4.50.
"If PE guys end up owning it, I could see some management changes, but a strategic buyer would be more likely to let people go," he explained.
Garcea said Redknee's technology, management and sales force have put together an impressive track record, but investors want to see financial improvement. Redknee lost $9.9 million in the June quarter, up from a $3.56 million loss in the same quarter last year. Over the same two quarters, revenues was $40.52 million, which was down from $46.66 million for the same 2015 period.
One factor slowing Redknee is integration of its 2015 acquisition of European IT company Orga Systems.
"In the U.S., you can integrate an IT company in a quarter," Garcea said. "In some parts of Europe, it could take a year and you have to work with the unions."