Cash injection will buy time for Xero

Rod Drury says getting an investor of Accel's calibre is a huge endorsement for the company. Photo / Dean Purcell

A$147 million capital injection from North American investors will buy Xero some breathing room as it forges on with international growth ahead of a potential sharemarket float in the United States, says an analyst.

The cloud accounting software provider yesterday announced that it had raised $132.9 million from a new investor, California-based venture capital firm Accel Partners, plus a further $14.3 million from existing shareholder Matrix Capital Management.

Following the transaction, the software firm will have a cash balance of about $285 million.

Forsyth Barr analyst Blair Galpin said the fact that Xero had raised the funding at $20 a share, a significant premium to the levels the stock had been trading at in recent weeks, was a positive sign.

"What it does do ... is give Xero time to manage what it wants to do around the potential IPO and listing in the US market," Galpin said. "I think it's very positive for Xero, it gives them time to work out what they want to do in each market [and] time to prove what they can do in the US."

Xero yesterday indicated it would use the proceeds of its latest capital raising to fuel innovation and growth, particularly in the US and Britain.

Chief executive Rod Drury said getting an investor of Accel's calibre on board was a huge endorsement for the company.

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"[Existing] shareholders should be, and are, delighted," Drury said.

He said the cash raised could potentially fund acquisitions of small software-as-a-service businesses.

"It's just a good, solid warchest and means that no matter what happens in the market, Xero's going to be around for many, many years," Drury said. "We can just put our heads down and execute our plan."

Accel partner Andrew Braccia said the company saw an opportunity for millions of small businesses to use Xero's platform.

Accel will have a roughly 4.9 per cent stake in the company following the capital raising. Matrix, Xero's largest institutional investor, will own just over 9 per cent of the firm, which hit $100 million in annualised revenue last year.

The Wellington-based software developer, which has a target of reaching one million customers and is making an aggressive push into the US market, came under pressure in late 2014 after a number of analysts downgraded their recommendations on the stock after the firm reported disappointing US growth. And its former North America chief executive, Peter Karpas, resigned suddenly in September after only six months.

In December Xero announced it had surpassed 400,000 customers and was "back on track" in the US.

Its shares, which hit a record $45.99 in March last year before falling sharply, rose 26 per cent on the capital raising news to close at $23 last night, giving Xero a market capitalisation of just under $3 billion.

The company also announced it had appointed Russell Fujioka as its US president.

Stock Takes: Xero says funding news kept under wraps but some suspect a leak

Xero's rapidly rising stock price had many market watchers scratching their heads last week.

For the first half of February, shares in the cloud accounting software provider didn't stray far from the $16 level.

But despite no price-sensitive information being released to the market, its shares jumped 21 per cent between the open last Monday morning and the close on Friday, rising from $16.20 to $19.70.

The gains caught the attention of sharemarket operator NZX, which issued Xero with a "please explain" notice on Thursday. In response, the firm said it was in compliance with its continuous disclosure obligations.

Then Xero revealed yesterday morning that it had raised more than $147 million in growth capital from two United States investors, which will increase the company's war chest to $285 million.

News of the capital raising sent the shares on another major rally, rising 26 per cent to close at $23 last night, their highest close since September.

Some investors who bought shares early last week have done very nicely indeed.

But Xero chief executive Rod Drury is adamant the pre-announcement share price gains were unrelated to the capital raising.

He said the company kept the information under wraps, while also keeping a close eye on Xero's share register.

"It was a massive surprise to all of our staff - very few people inside Xero knew about it," Drury told Stock Takes.

But some market players are not so sure that a leak hasn't occurred.

Devon Funds Management principal Paul Glass said he believed "news about the [share] placement must have leaked to some parties in the market to have had a stock price reaction like that before the announcement".

Forsyth Barr head of institutional broking David Price told BusinessDesk that in his opinion the pre-announcement trading "reeks to high heaven".

NZX regulations require listed companies to immediately inform the market of material information.

However, a so-called "safe harbour" provision provides an exemption to those rules if an incomplete proposal or negotiation - such as a capital raising - is under way, provided the information is kept confidential.

An NZX spokeswoman said the sharemarket operator would continue to monitor Xero's recent trading history, as is routine after a price inquiry has been issued.

See the Xero announcement here: