Canada's Constellation Software wants to take over tech firm Eroad

Thursday, 22 June 2023

Transport software company Eroad has attracted a potential bid from Canadian firm Constellation Software.

Canadian company Constellation Software has taken an 18% stake in kiwi tech company Eroad and is seeking to buy the remaining shares in a bid valuing the company at $147 million.

In a statement to the NZX on Thursday, Eroad’s board said Toronto Stock Exchange-listed Constellation Software, through its subsidiary Brillian, is prepared to offer $1.30 a share for Eroad. That’s a premium to the stock’s 77 cent closing price on the NZX on Wednesday.

Eroad’s shares jumped 57% to $1.21 in early afternoon trading on the NZX on Thursday, after a trading halt was lifted at 12.08pm. The stock was the most active on the market by volume and value, and the biggest gainer.

Eroad’s board said it will consider Constellation’s offer alongside its financial advisor Goldman Sachs and its legal advisor Chapman Tripp.

“The board will act in what it considers to be the best interests of the company and its shareholders,” the company said, noting it would assess the merits of the offer relative to the work it already had underway aimed at driving further growth in the North American market.

A truck has driven more than 100 kilometres in the USA with no human on board and no human intervention using technology developed by TuSimple.

Constellation is making a tilt for Eroad after the tech company’s shares have suffered a big decline. Eroad’s shares had lost 75% of their value over the past three years as the transport software company struggled to gain traction in its key growth market in North America and following the departure of both its long-standing chief executive and chief financial officer.

The bid for Eroad comes after fellow tech company Pushpay, which specialised in church donation software, was taken over by an overseas consortium in May. Pushpay’s shares had lost a third of their value over the previous year, which brokers said made it an attractive takeover target.

“I think this is a signal to the market that some of these companies are too cheap,” said Hobson Wealth Partners investment adviser Brad Gordon. “I think New Zealand tech in general has been really oversold, and Eroad has been at the forefront of that. It's been a pretty material de-rating.”

Technology stocks have had a bit of a battering on the sharemarket in recent times as rising interest rates prompted investors to re-evaluate the prospects of high-growth companies, with risk-averse investors preferring the security of companies that can continue to sustain and grow earnings.

Eroad listed on the NZX in 2014 after selling shares in an initial public offering at $3 each. The stock joined the benchmark NZX 50 Index in December 2021 but fell out of the index a year later, which Gordon said had prompted more selling as passive funds which tracked the index sold down their holdings.

“When these types of companies get removed from an index, it can take a long time for passive funds to be able to get out because they have got to find buyers, and it can just really lead to a long grind in share prices and oversold levels. A falling share price can perpetuate more selling.”

Still, Gordon noted that the company had also had a couple of trip ups and hadn’t delivered the results that investors wanted.

Eroad narrowed its loss to $3m in the year to the end of March, from a $9.6m loss the previous year, and it aims to break even in its 2025 financial year.

One of the country’s most successful tech companies, online marketplace Trade Me, was sold for $750m to Australia’s Fairfax in 2006, and was later taken private in 2019 following a $2.56 billion takeover by British private equity firm Apax Partners.

While some lament the loss of promising local companies, others note it allows capital to be reinvested back into the sector, helping early-stage growth companies become successful.