Analysts are speculating that there may be a buy-in at FrontRange after the group said in a cautionary notice yesterday that it is in talks.
The FrontRange share rose more than 11% on the JSE yesterday after the cautionary notice was issued. By late this morning it was trading at 190c, up 12c or 6.74% from yesterday`s close.
The group derives about 98% of its revenue from its US subsidiary, FrontRange Solutions.
Barnard Jacobs Mellet analyst Craig Hackney says he believes the company is undervalued.
"If you compare the valuation to international peers on a price-to-revenue basis - which is a very unfashionable way to value businesses at the moment, but it`s the only way that you can with these sorts of businesses - it would seem to be grossly undervalued.
"They`ve been talking about getting a private equity player to inject capital into the business, but why would a private equity player want to inject capital at the US subsidiary level at a high valuation when they can just come in and buy the company at a lower valuation here? That has been the trick."
He says there is speculation about a buyout transaction or a buy-in transaction, but the exact mechanics of that are unclear.
"All I can think of is that someone is considering buying them," says PSG Online analyst Uys van Straaten. "The other thing is taking out the minorities, but I don`t know that it`s a possibility at this stage."
He says that although FrontRange announced with its last quarterly results that it had cash reserves of about $12 million, it needs that money to run the company, and it is unlikely that will be used to buy out minorities.
Says Hackney: "The best thing for them to do would be, if they could, buy out minorities, delist the company and then get a private equity player to buy in at a higher multiple as a private company.
"But whether they have the funding to be able to do that is the issue."
Fellow IT company MB Technologies recently announced that a management buyout was being proposed.
"When management teams see the sorts of valuations prevailing in the IT sector that we are seeing now, I think it is quite easy for some teams to become disillusioned and to think, 'Well, why should we remain listed when it is costing us a fair amount, we`re under public scrutiny all the time. If we can buy the business back at very depressed levels we can create value for ourselves going forward," says Hackney.
"It wouldn`t surprise me if we do see a bit more of this kind of activity. I just think minority shareholders need to be quite adamant that they are not being short-changed.
"Obviously from a management point of view it makes sense to list in high periods and delist in low periods, treat the stock exchange a bit like a bank teller machine, which I don`t think is what you should do."
Van Straaten says FrontRange chairman Dana Buys has a point to prove to the market, and he believes the next quarter`s results "will not be too bad".
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