By Simon Evans
The tougher times forecast for the real estate market as interest rates rise, plus a general compression in multiples for growth stocks, has triggered a 35 per cent drop in six months in the share price of electronic conveyancing group PEXA, of which takeover target Link Group owns a 43 per cent stake.
The PEXA stake is the jewel in the crown asset of Link Group, a superannuation administrator and share registry company.
PEXA, a near monopoly operator in e-conveyancing and property settlements, is listed in its own right on the ASX but faces a tougher road as the housing market is also hurt by households coming under pressure from rising energy bills and food inflation just as interest rates jump sharply.
There is growing pressure on the Link board to return to the negotiating table with Canadian suitor Dye & Durham, which in December made a $2.9 billion takeover offer for Link at $5.50.
Link shares are sitting at $3.69, 33 per cent below the offer price, following an adverse preliminary ruling from the Australian Competition and Consumer Commission and a sharp sell-off in sharemarkets around the world.
John Ayoub, portfolio manager with Wilson Asset Management, said the share price gap between Link’s current price and the offer price, along with the ACCC concerns, means there is an assumption of “heightened risk to the transaction”.
“It could be best to get back to the table,” he said.
Mr Ayoub said PEXA shares had come off significantly since the start of January ahead of a softer real estate market and the broad sharemarket thematic of a “compression in valuations of growth stocks”.
The PEXA stake owned by Link is at the core of the concerns outlined on June 16 by the ACCC.
The ACCC said: “There is considerable uncertainty regarding the extent to which the existing and likely future regulatory framework can be relied upon to constrain PEXA and D&D’s conduct post-acquisition.”
Interestingly, PEXA shares rose by 8 per cent on Friday to $13.17. They had been as low as $11.58 on June 17. PEXA was trading at $20.35 on the ASX on January 4.
The ACCC said it had significant concerns about the Dye & Durham bid because of potential vertical integration, which would hinder competition as the digitisation of conveyancing in the real estate market accelerates.
Dye & Durham already provides information broking services, conveyancing and legal practice management software and manual property settlement services in Australia.
Dye & Durham, listed on the Toronto stock exchange, said after the ACCC preliminary statement that it was “concerned” about what the commission had outlined and that it was evaluating what impact it might have on the proposed transaction with Link.
Four buyout bids
Link has been through a rollercoaster two years, during which four buyout bids have lobbed, with the Dye & Durham offer the latest. The bids have been a significant distraction for Link’s management team, led by chief executive Vivek Bhatia.
US private equity firm The Carlyle Group walked away after weeks of detailed due diligence late last year, following an initial offer of $5.38 a share made up of two components – $3 for the core Link business and a pro rata distribution of Link’s 42.8 per cent stake in PEXA to Link’s shareholders.
In late 2020, Carlyle and Pacific Equity Partners pursued Link in a combined tilt in which an indicative offer reached as high as $5.40. United States group SS&C Technologies made a $3 billion buyout proposal in late 2020, but pulled out after a month of due diligence.
PEXA has been pointing to an expansion in the United Kingdom as one of its growth areas, saying a revamp of the antiquated 150-year-old paper-based property settlement system would help kick things along even as interest rates rise, with mortgage holders looking to refinance and set up new mortgages.
PEXA’s UK boss, James Bawa, said last month that one in five people looking to redo mortgages as they hunted for a competitive rate simply gave up because of the logjams and congestion in an outdated paper-based system.
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