ESI plan draws fire
If Francis roche has any influence, the going private transaction at burnaby, b.c.-based ESI Entertainment Systems will be rejected and, in turn shareholders will demand a fairer — and much higher — price.
“Minority shareholders deserve to be treated better,” said roche, head of the financial consulting firm, roche Securities. Indeed, roche may end up having considerable clout because he has been retained by two shareholders who, in total, own about 8% of the software development company.
To go private, eSI, which has called a shareholders meeting for Oct. 28, two-thirds of the shares voted at the meeting (which seems assured because the insiders own 53.2%); and a majority of the minority. In all, eSI has 14.2 million shares outstanding — though not all will be voted.
The transaction has the support of a one-person special committee, which ruled it was “in the best interests of the company and fair to the minority shareholders.” The director on the special committee owns no shares, even though he has been a director since August 2007. eSI has two other directors.
If eSI does go private — the insiders are offering 5.5¢ a share — it will conclude 71/2 years in the public markets. It went public at $3 a share in March 2006, a financing that gave eSI a $57-million valuation. Now, eSI, whose shares are listed on the cNSX, is valued at less than $800,000 — a loss of more than 98% for those who stayed for the ride. Most of that slide occurred in mid2008 when eSI “agreed to admit it had violated certain U.S. laws” and pay a total of US$9.1-million “and to cease processing transactions which involved U.S. citizens and illegal online gambling.”
but roche declares the price is not high enough given the consideration being offered for the under-promoted, little-traded company, amounts to 0.24 times annualized first-quarter revenue and 1.8 times annualized first-quarter profit. In the first quarter, revenue was $807,567 while net comprehensive income was $110,869.
roche has reservations about parts of the methodology. In its report evans & evans, the firm retained by the special committee, used the so-called going concern basis. It used two approaches: ebITdA and discounted cash flow (where a discount rate of 23.0%-24.6% was employed).
Its conclusion: Fair market value was in the range of 4.6¢-6.4¢. (complicating the process is that the buying group “advised the special committee that its members were not prepared to sell their interests in the company, and no sale of the company to another buyer is possible without” its co-operation.)
but the going concern value was in the range of $2.1-million - $2.4-million — or about three times fair market value. “This going concern value indicates goodwill in the range of $4.2-million to $4.4-million,” said the circular.
In roche’s view, “There is a strong case the company’s real value is at least several multiples higher than what the evans report concludes. Also, it is not clear if the evans report is assigning any value to company goodwill and the public listing.”
roche is also concerned eSI is being taken private at a time when better times lie ahead.
The evans report notes eSI has forecasted revenue of $4.3-million in fiscal 2016 versus $2.55-million in fiscal 2013.
calls placed to Michael Weeks, eSI’s chief executive seeking a comment weren’t returned.