The outcome of Datalex’s extraordinary general meeting (egm) next Thursday on plans to delist the retail software provider to airlines, after 25 years on the Dublin market, is a fait accompli.
The company needs 75 per cent of voting investors to back the resolution. The three biggest shareholders, led by billionaire Dermot Desmond, now own 75.7 per cent between them and are steadfast behind the plan. This wouldn’t have been on the table without the say-so from Desmond, who owns 49 per cent of the equity.
In addition, members of the board, chaired by David Hargaden, have committed their combined 0.78 per cent.
Datalex has argued that delisting the company will free up management to focus more on strategy and execution, cut as much as $1.4 million of annual costs linked to it being a quoted business, and give it greater access to capital, including private equity or strategic investors.
READ MORE
It would also improve the perception of the company among customers, suppliers, and staff, not to have quoted market value as a negative reference point, having languished for years at a discount to what analysts see as its real value.
But why now? Especially when Datalex is showing real signs of life? It follows years of turmoil, triggered by an accounting scandal in early 2019, exacerbated by the Covid-19 pandemic, and not helped by the company putting out what turned out to be an overly optimistic set of medium-term financial targets in 2023.
Datalex reported at the end of July, the day it announced the delisting plan, that it had reached a milestone of returning to positive earnings before interest, tax, depreciation and amortisation – albeit after stripping out currency fluctuations. Sales had increased 9 per cent on the year to €14.5 million.
However, crucially, platform revenue – a recurring form of revenue earned from airlines using its products to sell seats and ancillary products – increased by 33 per cent to €9.6 million. This is a result of Datalex shifting over the past five years from a company that built bespoke, and expensive, systems for airlines to essentially selling off-the-shelf software products designed to help carriers squeeze the most out of customers.
The lack of tradable stock outside the hands of the main shareholders has, for sure, affected the liquidity of the shares and Datalex’s market value for some time. But the company’s continual reliance on high-cost loans – at rates of up to 18 per cent – from Desmond over the past six years also made it uninvestable for many.
Why is the delivery of vital infrastructure so slow in Ireland?
The group raised €50 million of equity in two deals in the past four years, mainly to repay emergency loans from Desmond’s Tireragh vehicle. While Desmond was the main subscriber to the stock sales, resulting in his stake rising to 49 per cent, several brave institutions and individuals also backed the equity raises in the hope that Datalex would fulfil its potential.
“It’s a real kick in the teeth for small investors,” one aggrieved shareholder, who declined to be named, told this column of the plan to delist.
Small-time investors who opt to stay on board will learn – if they don’t already know – that Datalex will not have the same requirements to update them on developments as it would as a listed company.
While Datalex has made arrangements for a UK-regulated specialist venue for matching buyers and sellers of unlisted stocks, called JP Jenkins, to offer shareholders the possibility of trading stock after it delists, it will become much more difficult to trade – and, worse still, determine the market value of their investment.
Some institutional investors will become forced sellers, as they are not allowed to hold shares in companies that aren’t quoted on a regulated exchange. We’ve already seen Herald Asset Management, a London-based investment firm led by celebrated City stock-picker Katie Potts, dump its entire 3.7 per cent stake within days of the delisting announcement.
Herald was a long-time shareholder in Datalex – predating the 2019 accounting shock – and was a significant backer of the latest equity raise 12 months ago, when shares were offered at 45 cents a piece. The stock was trading as low as 25 cent on the day Potts was known to be selling out.
Businessman Nick Furlong’s Pageant Investments and former Glen Dimplex chief executive Sean O’Driscoll, who are backing the delisting plan, were active buyers in the market around that time. The increase in their combined holding helped tip the voting power of supporters above the key 75 per cent level.
Datalex, whose customers include Aer Lingus, EasyJet and Air China, said at the end of July that it planned to raise €6 million of debt within a month to invest in its core platform and boost working capital. It revealed on Friday that closing of the deal is taking longer than expected and that it anticipated completion “in the coming weeks”. Investors are unlikely to find out by Thursday’s egm whether the company has managed to wean itself off reliance on finance from Desmond. However, Datalex’s recent improved trading performance should make it easier to raise bank or market finance.
Hargaden said in the shareholder circular on the upcoming egm that the board “considers that the cancellation is in the best interests of the company and its shareholders as a whole”.
Surely, a much fairer – and cleaner – outcome for minority investors would have been for the board to hold out for a take-private offer, priced to reflect the business’s potential – and sense-checked by independent advice.
