Remaining Orion Health shareholders should sell their shares, says one analyst who values the company at 79c following a buyback at $1.22 per share that was completed this morning.
The buyback was the final stage of a complex deal that saw UK private equity outfit HG Capital take control of Orion's profitable Rhapsody division, while the Auckland-based company retails its money-losing Population Health and Hospitals units (read a primer here).
A total of 1873 shareholders accepted the buyback offer, boosting founder and chief executive Ian McCrae's holding from 50.1 per cent to 85.6 per cent in the process.
Craigs Investment Partners analyst Stephen Ridgewell says smaller investors followed the lead of large minority investors Pioneer Capital and Geoff Cumming, plus Orion's independent directors, who all accepted the offer for all of their shares.
An independent report by Korda Mentha also supported the offer, as did the NZ Shareholders Association - albeit with the lukewarm endorsement that it was the only viable option at this stage of events.
Ridgewell notes that the buyback saw McCrae fall just short of the 90 per cent threshold required to trigger a mandatory 100 per cent takeover - and that the deal documentation said in that circumstance, the buyback price was not guaranteed; investors preferred to take the certain offer that was on the table.
The Craigs analyst says Orion should not have sold its golden goose.
He told the Herald that a better path would have been for Orion to fold the red-ink generating Population and Hospitals and keep the cash cow Rhapsody.
If that strategy had been followed, he says Orion's shares could be worth $583m today, or $2.90 a share, based on the valuation of software industry peers with similar traits including Vista and Gentrack.
"If they had held on to the golden goose rather than sell it to offshore parties, the outcome could have been a lot better," he says.
"It's a real shame the right decisions haven't been made over the past two to three years - for smaller shareholders, and McCrae himself."
The Herald has asked Orion for comment on Ridgewell's analysis today, but its point of view has already been well essayed. At the companys annual meeting on October 1, chairman Andrew Ferrier told shareholders they had to be realistic. Orion needed to recapitalise, and Rhapsody was the only asset that was attractive to buyers.
McCrae added that HG was the only suitor willing to let Orion keep a chunk of Rhapsody (it retains a 25 per cent holding), and up for a stake in Population Health (in which the UK outfit now has a 25 per cent stake).
He disagreed with one shareholder's description of the Population and Hospitals units as "lame ducks." The two lines of business were simply less mature products than Rhapsody, he said. Funds from the HQ deal would be used to develop them toward profitability, though he did not give any specific timeline for them getting into the black.
Ridgewell is dark on the remaining businesses, however. He says his 79c valuation is based on Population and Hospitals poor and deteriorating financial performance over the past four years, plus low liquidity (the free float is now just 12m shares valued at around $14m) and low market interest.
The Craigs analyst also says Orion has been "consistently over-optimistic" in its forecasts over the past couple of years - a period that has seen it struggle in the key US market as once-lucrative "Obamacare" customers have closed down or stopped buying its product amid the ongoing uncertainty of the Trump era.
Ridgewell also notes that chairman Ferrier and independent directors Paul Shearer, and John Halmaka have all resigned as the deal wraps up. CFO Mark Tisdall has also exited.
So, what's next?
"The remaining businesses have generated substantial losses over the past four years, and we believe will continue to do so in the foreseeable future," Ridgewell says.
"We see limited ability for Orion to raise further capital from its remaining shareholders, although we do see scope for Orion to sell its remaining 25 per cent equity stake in Rhapsody valued at $28m on top of a cash pile of $26m to fund ongoing losses."