Eroad investors grill management on buyout offer, Mainfreight freeze

Eroad CEO Mark Heine has conceded recent missteps, but says his firm is now back on track. Photo / Dean Purcell

“It is important to acknowledge that Eroad’s share price performance has been unsatisfactory over the past year, for reasons related to the market but also of our own making,” chairwoman Susan Paterson told shareholders at the fleet management firm’s annual meeting in Auckland this afternoon - which took place against the backdrop of a takeover offer by Volaris - ultimately owned by Toronto-listed Constellation Software.

A lot of the issues related to the $158 million takeover of rival Coretex in 2021 - itself a bid to make up for lost ground in the key North American market - and the merger of its business with Eroad’s.

“The process was largely hampered by Covid and our ability travel, but also inventory issues as global supply chains were disrupted. We also had some challenges in bringing the two technologies together,” Paterson said.

“We are now at the point where shareholders will start to reap the rewards.”

Paterson’s message: Stick with Eroad’s turnaround plan and ignore the Canadian raider’s offer.

Shareholders spoken to by the Herald agreed that the offer was too low, but also needed more convincing that Eroad was on the road to recovery.

“There’s been a sustained share price collapse - that’s probably the only word for it - and a withdrawal of institutional investors that has allowed Volaris to build a stake,” investor (and former Eroad CFO) Alex Ball said from the floor. He wanted to know how the current management would improve performance.

Paterson said Eroad had cut $10m in costs with measures that included a reduction in headcount from around 650 staff to around 450. She said Eroad had now worked through all of the challenges involved in integrating Coretex.

The Mainfreight factor

NZ Shareholders Association representative Bruce Parkes asked if Eroad was seeing any impact from the economic slowdown, given yesterday Mainfreight announced a hiring freeze, citing slowing freight volumes. Mainfreight has been featured as a hero Eroad customer.

Eroad chief executive Mark Heine said the first quarter had been “very strong with 8000 new connections”.

Immediately after the meeting, he told the Herald: “We know some of our customers are doing it tough.” But he pitched Eroad’s fleet management hardware and software as a way to cut costs and save petrol. The company stood by its full-year guidance.

Heine reiterated a 9000-truck deal with US food services giant Sysco, first announced in November last year. The CEO said Sysco’s rollout was now underway.

He also underlined the 500-tanker deal that Eroad signed with Fonterra in January. Eroad technology will be used for telematics, video surveillance with high-resolution dual cameras (with one lens on the driver, the other on the road), and calculating road user charges.

Heine said his firm would also assess the opportunity created by light electric vehicles losing their road user charges exemption from next year.

‘Anything less than $1.80 would be criminal’

Another shareholder, Malcolm Stokes, said he hoped “independent directors hold out to maintain it as an NZ company rather than allowing a cheap shot to remove it”.

Stokes - reflecting the mood of the room - agreed with board’s decision the offer did not even warrant due diligence. “Anything less than $1.80 would be criminal,” Stokes told the Herald. “It’s probably worth $2.30 [a share].”

On June 22, Volaris revealed it had built an 18 per cent stake in Eroad and made an unsolicited, all-cash full takeover offer at $1.30 per share, valuing the firm at $232m.

While a 69 per cent premium on Eroad’s previous close, it was still well below Eroad’s all-time high of $6.61 in July 2021 before troughing to 52c on disappointing results and an abrupt and unexpected CEO transition.

Impact of 3G network closures

The NZSA’s Parkes also asked about the impact of 3G network shutdowns that have now been confirmed over the next 18 months by One NZ (Eroad’s local partner), Spark and 2degrees.

CFO Margaret Warrington said Eroad was 40 per cent through its 3G replacement programme. It would not be completed this financial year. Heine said if 3G access was lost before the 4G replacement programme was completed, 2G could be used as a fallback (telcos are maintaining 2G for internet of things or IoT networks for at least the medium term).

Former Eroad CEO and current major shareholder Steven Newman has returned as an independent consultant.

Warrington did acknowledge the impact of Eroad’s “accelerated” 3G replacement programme, saying the firm could have been cashflow positive now if it had not been for the cost of upgrading customers’ gear to 4G (as things stand, Eroad is forecasting it will be cashflow neutral in 2025 and cashflow positive in 2026)

Earlier this week, things were at a standoff.

On Tuesday, the wannabe Canadian raider said in a statement in response to speculation: “Volaris Group wishes to clarify that it currently has no intention to increase its proposal price under its NBIO, although it reserves its right to do so if there is a change of circumstances - including, but not limited to, being granted access to due diligence by Eroad”.

On June 22, Volaris revealed it had built an 18 per cent stake in Eroad and made an unsolicited, all-cash full takeover offer at $1.30 per share - a 69 per cent premium on Eroad’s previous close that valued the firm at $232 million.

On July 12, Eroad’s board said the deal “materially undervalues” its business and fell below the level at which the board was willing to grant due diligence.

Shares closed Monday at $1.44, implying some investors are betting the Canadians will come back with a better offer (all parties are keenly aware the stock hit an all-time high of $6.61 in July 2021 before troughing to 52c on disappointing results and an abrupt and unexpected CEO transition), but were back to $1.40 just ahead of today’s meeting.

Eroad CEO Mark Heine has conceded recent missteps, but says his firm is now back on track. Photo / Dean Purcell

Monday also saw the return of longtime CEO Steven Newman, who will serve as an independent consultant to Eroad’s Technology Board Committee.

Following his surprise, abrupt departure in 2021, Newman remained the single largest shareholder in Eroad. He currently holds a 12 per cent stake, according to a June 16 filing.

Heine told the Herald that Eroad had made strategic missteps including under-investing in the key US market (where it sought to make up time via its $158m acquisition of rival Coretex in a deal that closed in 2021). But Heine also said he had an amicable relationship with Newman, and the pair talked regularly.

Newman took some flak online following his departure.

But the NZ Shareholders Association, which earlier backed Eroad’s board in rejecting Volaris’s offer as too low, said the ex-CEO’s return made sense.

“NZSA regards this as positive as it gives Eroad access to a known, tried and tested technology resource who is, through his significant shareholding, aligned with shareholders and creating shareholder value. We believe this will also support Mark Heine’s strategy of operational and R&D efficiency,” chairman Andrew Reding said.

A mix of shareholders chatted amicably with Newman after the AGM, undercutting various online narratives about his return.

The NZSA says the best way forward could be Volaris taking a strategic stake - to help fund investment in new products - but not full control.

At the AGM, former Ports of Auckland chief executive Tony Gibson retired as an independent director. He was replaced by David Green, a former senior executive with ANZ and Deutsche Bank.

In a symbolic black eye for the company, a “Non-Binding Say on Pay” resolution (”That Eroad’s Remuneration Report for the year ended 31 March 2023, as set out in the FY23 Annual Report be adopted) was lost by 21,635,540 votes to 20,362,855, with 17,665,511 abstentions.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.