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Rod Drury goes to town on MYOB IPO rumours

Market chatter is building around a possible MYOB IPO.

The accounting software company was de-listed from the ASX after being bought by private equity player Archer Capital in January 2009 for $A560 million.

In September 2011, Archer sold MYOB to another private equity outfit, Bain Capital, for $A1.2 billion. The deal was part-financed by loading MYOB with $A530 million debt.

Now, The Australian Financial Review’s Street Talk column has speculated that Bain may be tempted to take the company public again.

Street Talk has a pretty solid track record for tipping MYOB’s next move – and the AFR carried a second mention of the possibility this week, this time in a column authored by a corporate advisor who bought into the company’s recent debt listing (more on which below).

The paper notes that while Bain usually holds investments for around five years, it may be wary of missing the window of opportunity in today’s relatively buoyant market.

NBR asked MYOB business division GM James Scollay for comment. He said the company never responds to market speculation (Kiwi ex-pat Mr Scollay, who has been with MYOB for around a year, based in Sydney, recently took on the responsibilities of Auckland-based MYOB New Zealand GM Julian Smith, who left the company in January).

Nature abhors a vacuum, and into this one comes tumbling Xero CEO Rod Drury.

Bain is looking to offload MYOB as soon as it can, Mr Drury told NBR Online (he has also pushed this theory on social media where, since the high-profile Mr Smith's departure, MYOB has lacked a counter-puncher. The company is adding NZ Twitter feed to supplement its Australia-NZ account).

"Bain is raising debt and taking cash out of the business,” the Xero CEO says.

And it’s a blunt fact Bain has done just that.

It geared MYOB with a further $A100 million or so debt on December 4 through listing $A155 million worth of subordinated five-year notes on the ASX.

The notes were listed at $A100 [ASX:MYBG] and closed yesterday at $A96.10. Interest is a minimum 10% for the first four periods. MYOB can suspend interest payments in future if it does not meet cash flow targets. The latest flurry of excitement in the AFR centres on a section of the listed debt the prospectus headed “Early redemption – IPO”, which details a modest bonus in the event Bain does take MYOB public (“The Issuer may redeem all or part of the Notes concurrently with an initial public offering of MYOB for an amount between 102.5 per cent and 100 per cent of the Face Value of such Notes depending on the time of redemption. There is no guarantee that an IPO will occur.”)

The prospectus detailed that $A90.2 million would go to MYOB's parent company, owned by Bain [UPDATE: $A90 million went toward buying Auckland company Banklink at the end of May], and $A50.3 million was ear-marked for retiring existing debt.

Having a private equity owner distracts from focus, Mr Drury maintains.  

“If you look at the MYOB community site, their software has been getting panned since they have been under Private Equity ownership,” he tells NBR (and he’s forwarded various links to MYOB discussion forums).

MYOB’s Mr Scollay concedes initial reaction to MYOB’s latest products (the pure cloud LiveAccounts and the cloud/desktop hybrid AccountRight Live) was disappointing.

“The initial response wasn’t what we wanted," he tells NBR, explaining the transition to more online-focused products, "Posed some architectural and technical challenges. It’s far from a straightforward thing to do technically to take an existing platform and cloud-enable it, but it’s been worth the effort.”

Now, feedback from customers is strong and the Live platform is going from strength-to-strength, he says.

The GM says the SME market is very-price focused, and has been responsive to LiveAccounts’ $25 per month subscriptions (Xero’s cheapest product starts at $29 in as much as you can make an apples-to-apples comparison; the two companies also spar over what features are available at their various price points).

Mr Scollay says the pure-online LiveAccounts is more price competitive than Xero, while the online-offline hybrid AccountRightLive offers more flexibility than the all-cloud, all-of-the-time Xero.

AccountRightLive lets you work on a file over the internet, he says, or “check it out” and work on a local copy on your desktop. (MYOB also used to tout that its hybrid product made it easy to take a local copy of a file - a boon given IRD had warned it was technically illegal to keep financial records offshore. The law has just been updated, allowing Xero - and MYOB with its pure-cloud LiveAccounts - to apply for a blanket exemption for its customers, which it has duly done).

Mr Drury counters that setup was chosen because it was the cheapest way to adapt a legacy product. “MYOB has to have a comprised desktop and cloud model as they had such a legacy investment in their desktop products.  Instead of investing in a full online accounting engine they are syncing data between client and the cloud which is the worst of both worlds.  You still have clunky desktop software and slow updates.  The software will be slow to load and doesn't provide the main benefits in of being in the cloud which is businesses connecting to each other and advisors connected to accountants seamlessly.”

The punch and counterpunch goes on. Mr Scollay says running AccountRightLive as an app, rather than in a web browser like Xero, makes it faster. Mr Drury says it’s a less flexible approach.

Most MYOB business division customers have less 20 staff, Mr Scollay says (the company also has divisions making software for enterprise, and for accountants).

He refutes the theory that the cheaper pricing indicates MYOB is playing catch-up in the cloud (where, apart from Xero, it opposition includes the veteran Intuit, which recently launched an online version of its QuickBooks product across the Tasman, and Reckon).

“Hundreds of customers a week” are adopting Live, Mr Scollay says (some of those moving across from existing MYOB products).

Mr Dury has challenged MYOB to give a specific figure around its number of current, playing customers (Xero recently said it had a total of 157,000 customers, with subscribers in Australia tripling over the past year to 51,000).

Mr Scollay says Xero only reported customer numbers because as a listed company it is required to do so in NZX and ASX filings (and that’s certainly a requirement – although it’s also correct that it’s hard to stop Mr Drury discussing customer numbers inbetween times).

He reiterates MYOB’s longstanding claim that it has sold software to more than 1 million customers across Australia and New Zealand. He adds that his business division has “hundreds of thousands of customers. (If you look at the fact MYOB had $212 million revenue last year, and take its pricing, rough numbers suggest it has somewhere in the region of 400,000 to 500,000 paying customers). One success story it will put a number on is its free small business website offer, launched in partnership with Westpac last June. The prospectus says 40,000 have signed up; Mr Scollay says around 10,000 of those are NZ companies.

Neither will Mr Scollay speak to financials, but he offer, "Not to take a dig at anyone, but at least we're probable." (Xero has forecast a larger loss for next year).

In point of fact, MYOB accounts filed with the ASX show the company making a loss of $A14.77 million on $A212 million revenue for the 12 months ended December 31, 2012.  Statements filed as part of the limited disclosure around the debt listing note there were several one-off expenses, including expenses around raising debt. The company is also in a transitional book-keeping phase as more of its customers move to its Live products, and monthly subscriptions. The debt prospectus notes an NPAT loss, but adds MYOB made a pro forma of $A22.7 million. NPATA (NPATA being NPAT - net profit after tax - after adding back tax effected amortisation expense).

The ASX filing and other material released by MYOB only compares FY2012 to limited FY2011 data (plus some from the final quarter of FY2011), making it difficult to speak to the company's growth. We do know from the debt prospectus that 2011 revenue was $A204 million (that is, it grew 6.8% in FY2012).

MYOB has around 750 staff; Xero (loss-making but cash rich thanks to being able to sell equity rather than debt) has around 400.

Mr Scollay says his division has around 100 developers. He came to MYOB from two companies in challenger positions (Macquarie Telecom and MessageLabs). It’s interesting to move to an incumbent, he says, and he’s involved in taking steps to change the culture and speed product updates.

And here we have the reason why Mr Drury is so front-foot with his critiques of MYOB and other established players.

The Xero boss is in a race to get a firm grip on the cloud market before established desktop software companies like Intuit, Sage and MYOB slowly turn around, like giant super-tankers, and finally gain momentum online (of course, one option for them to get there - at least in the case of the US and UK giants - is to by Xero).

No doubt he’s got his fingers crossed that MYOB will change ownership yet again, and that the transition might take it's eye off the ball.

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Comments and questions

Bagging the opposition is not a smart ploy by Rod Drury unless he is worried that Xero will get found wanting very soon.

He should just concentrate on getting Xero into profit and providing a reasonable return on capital invested.

MYOB are obviously a huge risk to Xero and Drury knows it.

Not gossip. I have a daughter who does enough of that.

Classic old school PE move - buy a company which has a dominant market position and profits with a lot of debt and a little equity, then pay down the debt in order to increase equity value. Increasing prices helps, too, but I guess that's already been done a lot.

Sadly, Bain didn't do their analysis well on that lasting income stream, and as good as Julian Smith was in NZ, the product MYOB are shifting is a dog compared to Xero. The online offering is years and years behind and the company seemingly culturally incapable of change.

If I were the owners I'd first increase annual maintenance fees and other prices, then take more money off the table in an IPO. That is a short-term answer, and destroys value for customers. But as with Yellow, I cannot see MYOB surviving at the current size and business model for long.

From your constant cheerleading comments it is obvious that you have Xero shares Lance.
Xero's long term problem isn't MYOB. It's whether Reckon and/or Intuit get their own online offerings in the US market up to speed before one of them needs to buy Xero at somewhere near the theoretical market price.
If they don't need it then its value is effectively nothing.

From what of I've seen of their offerings so far, Reckon (Australasian market only) and Intuit are a long long way off having products that come close to what Xero have to offer

I own no shares in companies listed on the NZX or ASX, including Xero.

If Intuit (whose shares I did own many years ago) or anyone else wants to take over Xero then they'll need to pay a premium to market price.

As B McC says below they are all years behind, and not even the biggest company could produce software of this scale, complexity and usability overnight. Apple failed to do maps, NZGov to do a payment system, Microsoft to do Windows and so on and on. Meanwhile Xero extends their lead.

Lance, you lack some basic financial acumen when making statements like that. Intuit will never - ever - takeover Xero at its current market cap, let alone at a premium. Xero has revenue of $40m and a marketcap of about $1.4bn. That would make Xero exceptionally dilutive for Intuit's shareholders and they would never get shareholders' approval to do such an acquisition.

Thus, Xero's share price is also a failure for the company - no one will ever buy it as a result, no matter how good a product it may be, and it is nearly impossible for the company to perform in a way that delivers an economic return to those shareholders who buy at 13 bucks. Let it be a lesson to them.

I'm struggling to understand how Xero shares at $1 at IPO, now worth $12+, have not delivered a return on capital invested. Am I missing something? Why are Kiwis so attached to the "tall poppy" syndrome?

Good analysis, Chris. The most telling part is your second to last paragraph.

Rod Drury is enjoying what is essentially a free PR ride in ANZ in the face of an abysmal comms job by MYOB. He's keen to leverage that advantage while it lasts or until someone credible enters this market.

What is really interesting is to compare his somewhat bombastic approach in ANZ with a more measured one elsewhere where there is real competition. MYOB would seem to be a write off given their bizarre corporate machinations.

Intuit in the US is a very different beast. Rod is aware of this and needs to grow to scale quickly before they launch a response.

The race has been running for years on elephants and then out of the trees a new competitor Xero emerges on a race horse. The elephant riders are none to impressed and buying new horses which they have to feed plus their elephants.

The old elephant jockeys only have so much feed which is expsensive and they may continue to find it hard to compete with Xero which only has to feed one horse.

Money in Bank (Xero) vs $hundreds of millions in debt (MYOB) - you go Rod Drury!