Patsystems Share Discussion Threads

[bg23] 30/11/2007 10:12

its been as quiet as the mary celeste here recently. no trade and no news.

i'm not sure how we can attest that certain trade volume was here or for who without any update on the current holdings being reported. but i don't expect you are necessarily incorrect.

there was some comment on the weaker $ affecting the numbers previously. i seem to remember reading that the company hedges 75% of $ exposure in a previous company report, so if there has been no change in policy, then the numbers won't be affected to heavily.

as for the companies update, given ION's presence, i'd expect it to be upbeat and positive regardless of the economic and business environment.

only 3 weeks to the update, if eacn is correct we may get a move prior to that by ION.

only thing to do is sit and watch and wait.

[greengiant] 30/11/2007 09:49

It looks like those 2 x 1m were buys, however, the 500k and the 1m on the 21st didn't belong to ION.

It definately seems that it is now ,more difficult for ION to get hold of shares - the question is will they get to 29.90% prior to the release of a TS - which I would expect to be positive.

gg

[greengiant] 27/11/2007 14:13

Doomsday,
I think they are buys, if they are then we have the following situation

21st November - 1m purchased
27th November - 2.5m purchased

Total shareholding now - 48,151k
Total shares in issue - 177,296k

Shareholding - 27.16%

Shares left to buy - 5m

gg

[doomsday_man] 27/11/2007 14:02

Gerardp, it looks like a rollover to me. The original purchase seems a lot for a PI, but I can't see ION buying shares on credit either.

[gerardp] 27/11/2007 13:57

More interesting are the 2 x 1m buys !

[greengiant] 27/11/2007 12:44

Just been told that the Trading statement has been pencilled in for Tuesday 18th December - awaiting confirmation, just e-mailed the company.

gg

[am1234] 27/11/2007 12:41

note the trades 350k sell 500k buy

[bg23] 23/11/2007 13:15

good post again eacn. clear concise and thoughtful.

re your last point, i would think that the majority of holders, myself included, have held for sufficient time to benefit at the 10% rate on a portion of my holding. certainly the founder shareholders will have been concerned by the chancellors move to raise capital gains tax rates.

i have been wondering how i and others might react to an early offer which is slightly lower than could be justified in a ''level tax'' environment.

i assume that ION might consider the benfits to founder shareholders, employees etc of the lower rate of tax currently available in their thinking, indeed it might even of quickened the pace of any potential offer as the major beneficiaries of the offer will be taxed at a rate of 10% not 18%. on an offer price of 36p ( your suggested minimum likely level)founder shareholders would be seeing a gain of an additional 2.88p per share, assuming that their initial investment cost has largely been covered by the return of capital when the firm transferred to aim and recently paid dividends.
assuming any offer completes prior to the proposed tax changes in april '08, this is a significant additional premium that will carry significant weight with the founders and long term individual shareholders.

(although i'm not an accountant, i assume the above are roughly correct)

given that ION's approach to this whole process has been well thought out from the begining and carried through, it may be that the process has been bought forward in order to use the powerful arguement of lower tax in an uncertain market environment.

the other side of that coin is that it plays into the companies hands if they can string out any offer process, put of any direct approach to shareholders by ION, until such time that the higher tax rate becomes effective, thus disadvantaging one of ION's arguements should they decide to move later ??

[greengiant] 23/11/2007 13:05

eacn,

Superb post! Thanks for that

gg

[p0lzeath] 23/11/2007 12:57

Seymour Pierce upgrades Desire Petroleum to buy and in a note on small cap tech stocks has buys for Coda, Geong, Maxima, Patsystems and ViaLogy.

[eacn] 23/11/2007 12:44

greengiant,

My guess is that ION's broker is currently doing the rounds, sounding out support for a bid from institutions and larger shareholders. This is an essential exercise when gauging the price at which to pitch the initial offer.

During this process it is not unusual to come across holders who would prefer to sell rather than wait for a bid, or who are prepared to sell on conditional terms (i.e. where they get some upside if a bid is announced within a defined timeframe). This may well explain why we have been seeing larger blocks of stock cross the market in the last 6 weeks.

Now that even Seymour Pierce are saying that a bid looks inevitable, I would expect the flow of stock to dry up. That won't bother ION unduly since they are across the 25% threshold and another 4% or so is not material in the wider scheme of things.

We are now at the end of the stake building phase and into the early stages of the offer process.

ION will want their offer to be recommended, and in an ideal world will wish to conduct limited due diligence (although with a public company that is a limited process). That implies getting board backing. Given that the CEO has indicated that he is not in favour of a bid, ION will need to put the board, and in particular the Chairman and non-execs under pressure via the institutions.

The institutions will want to back the management. But if ION's bid is high enough then the institutions will be suggesting to the non-execs that they seriously consider the offer. It will all boil down to the plausible return the company can generate for shareholders in coming years versus the money on the table now.

If it looks likely that a battle will ensue major shareholders supporting ION may throw in their lot by giving ION hard irrevocables. This is more likely in this case because ION already have a blocking stake and there is no evidence of interest from a third party.

With sufficient irrevocables ION can make an offer with 50% known support and then it becomes very difficult for the board to hold the line. With over 50% support the offer can be extended (albeit not indefinitely) and you can expect most PI's to throw in the towel. If this allows ION to get within shouting distance of 75% then I would expect the more recent institutional holders to break ranks with the management and throw in their lot with ION. In current markets a 30% profit in less than a year is a hard thing for a fund manager to resist.

With Xmas coming ION will want to get its lobbying over before the end of next week (after that getting hold of fund managers can be neigh on impossible). If at that point they feel they have sufficient support at a price they are prepared to pay, I would expect talks to commence with the board, and if these break down for an offer to be made, possibly before Xmas.

However, if the PI vote is crucial to the bid suceeding then they may wait until the New Year, because Xmas is not a good time to get PI's to respond to an offer.

Of course if ION don't think that the pre-close will be anything special they will probably wait until the New Year anyway, at which point the next obvious date is the finals (which would be fine by me, because with a bit of luck I could then book the gain into 2008/09 when the CGT rate could be 18%).

[greengiant] 23/11/2007 12:04

eacn,

It all appears to have gone quiet after the large buys earlier this week. Is it possible that ION have now exhausted their "source" and have to look for other possible area's to obtain the remaining 4.70%?

gg

[turtle head] 22/11/2007 11:53

Cool! I started to try and do the maths and ran out of fingers and toes!

[p0lzeath] 22/11/2007 10:55

I was just guessing but doesn't change my calculation much as GBP has pretty much stayed at par with EUR until this month.

[turtle head] 22/11/2007 10:53

pOlzeath - only a very small proportion of the European revenue will be Euros, the majority of the European business will be sterling denominated although some may even be dollar denominted given the prevelance of US banking giants in London.

[bg23] 22/11/2007 10:06

eacn, turtle, et al. some good posts, thanks for the views and considered thoughts.

green giant, i agree the company has its own merits, and have written of such previously and indicated that i am prepared to hold the shares on their own merits - no other real reason to hold them otherwise.

but it does appear that we may not have that option in the short to medium term.

i think its pretty striking that the analyst at seymour pierce, the companies broker, has stated pubicly that he believes that the company will be bid for.
either he's doing his job and commentating on the company and its prospects, or he's doing seymour's job of talking the price up to a predator.

[p0lzeath] 22/11/2007 09:57

Split of business:

Y/E 12/06
Europe 44% - est 50% £, 50% Euro
USA 36.5% - est 100% USD
Asia Pacific 19.5% - est 75% JPY, 25% USD

Currency changes

Currency, 2006, 2007 YTD, % change vs £
£, 1, 1, 0%
Euro, 1.46725, 1.47086, 0.251% (£ weaker)
USD, 1.84295, 1.99854, 8.442% (£ stronger)
JPY, 214.36323, 236.85216, 10.491% (£ stronger)

Take base of 100. Income % by currency using estimates above would be:

£ - 22%
EUR - 22%
USD - 41.4%
JPY - 14.6%

And after reduction due to Forex change:
£ - 22%
EUR - c.22%
USD - 37.9%
JPY - 13.1%
= 95%

I reckon adverse currency changes will trim 5% off like-for-like revenue before price increases, new income streams.

Interims noted:

Revenue for the first six months of 2007 was £7.8m (H1 2006 - £7.1m), an
increase of 10%. The impact of the weakening of both the US Dollar and the
Japanese Yen against Sterling since 31 December 2006 has reduced the reported
level of turnover by approximately £208k or 3%.

So my estimates are in line with that but show further deterioration.

Conclusion: not much to worry about given new business acquired.

[turtle head] 22/11/2007 09:14

I strongly doubt the L Theys shares were transferred into SEDAF - SEDAF have had exactly the same holding since flotation - you can check that by looking at the Directors reports of each set of company accounts.


I don't know how the rules are practically implemented but you can click on AIM rules and then you have to check the glossary for a definition of "not in public hands", which refers to "related parties", which then refers to "substantial shareholders" (and also the definition of "person") which made me assume that the ION shares would be counted.

Are you suggesting that the Tamesis sellers have sold half their 12m shares?

[bg23] 22/11/2007 09:09

in todays telegraph:

Patsystems, which makes trading software for investment banks, was the subject of increasing bid speculation after rival ION Trading increased its stake to 25.2pc.

Derek Brown, an analyst at Seymour Pierce, said there was "an overwhelming probability" that ION, which is backed by private equity firm TA Associates, would bid for Patsystems. The stock closed flat at 27½p.

[greengiant] 22/11/2007 07:30

eacn, agreed the $ weakness is a worry, but this should be offset by the Yen strength

gg

[eacn] 21/11/2007 21:35

greengiant,

Seymour Pierce are forecasting EPS for 2007 at 1.6p rising to 1.9p in 2008, which equates to a pre-tax profit before amortisation, share based payments and exceptionals of £3.1M in 2007 rising to £3.9M in 2008.

Given continued weakness of the $ the company will do well to meet these forecasts.

36p a share values the company at around £64M, which is over 16 times projected pre-tax earnings for 2008, or 23 times pro forma post tax earnings at the standard rate of corporation tax (I know that PTS is not projected to pay at the full rate for some years to come, but for relative valuation purposes this is irrelevant).

Anything above 20 times prospective post tax earnings would represent a good multiple for the sector and fair value for PTS shareholders, which is why I think 36p is sufficient to get ION over the 50% mark and well on the way to 75%.

Whether it will persuade the institutions is all down to the management's response and the premium over 36p that ION are prepared to offer.

[eacn] 21/11/2007 18:06

Turtle Head,

On the basis of research I undertook back in February 2007 I concluded that the L Theys holding was transferred into Sedaf SA. What is certain is that L Theys no longer has a notifiable holding.

My understanding of the rule governing declaration of shares "not in public hands" is that the ION stake and indeed any other institutional stake would not be included in this figure. However, it is possible that founder shareholder holdings would be included in the related party category because these shares were granted / acquired prior to the company's flotation or whilst these holders were employed by the company.

If this is the case then the SEDAF holding and part or all of the Brewin Dolphin holding may be included in the 28.4% figure, which suggests that smaller holders (the less than 3% brigade) have 13.5% more than I have suggested (i.e. 21.5% is in private or small institutional hands).

This makes more sense, because at 8% the market would be much tighter (and at 8% I would hold a significant proportion of the remaining free float, which seems unlikely). If I get time tomorrow I will ask the company to clarify this issue and report back.

With these adjustments, ION have an easier task on their hands.

I am convinced that the founder holders are prepared to sell (my analysis of the votes at the AGM strongly suggests that SEDAF voted against the s90 resolution). Founders probably represent 13.5%. The 21.5% in the hands of smaller shareholders is also up for grabs at the right price. Furthermore the 3% in Tamesis hands is likely to be available (my analysis suggests that the Tamesis holders have already sold 3% to ION). In total that makes 48% likely to support a bid at the right price. Together with ION's existing stake, these shares would take ION very close to the 75% mark.

While the institutions will back the management if they make a reasonable case for continued independence, they are unlikely to put up a fight if the ION bid gets beyond 50% and close to 75%. That looks quite possible.