Datalex rush to replace Desmond loans leaves bigger stake than ever

Datalex, the travel retail software group for airlines and one-time darling of the Irish stock market, has faced its fair share of headwinds in recent years. But chief executive Sean Corkery will be hoping he has gotten his timing right in launching a €25 million share sale to stabilise the company's finances just as arrivals and departure boards start to flicker again with activity in airports internationally.

The Dublin-listed company, whose software is used for booking flights, seats and bags and allowing carriers to sell on car, hotel and insurance deals, was only beginning to find its feet again in early 2020 – after an accounting scandal the previous year – when the pandemic struck.

Loans

As revenues collapsed last year with Covid-19 all but grounding the global aviation industry, Datalex was forced to accept an additional €10 million credit line from its main shareholder, Dermot Desmond on top of €11.3 million of expensive emergency loans he had given the company in 2019 to keep the show on the road.

Datalex is not placing much stock on international travel taking off any time soon, warning on Friday, as it began the equity raise, that its transaction volumes “will remain suppressed in 2021, when compared to 2019”.

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“In the short term, the outlook for the travel industry remains uncertain,” it said. “The travel industry’s recovery in 2021 is dependent upon the successful roll-out of Covid-19 vaccines worldwide and governmental action on the lifting of cross-border travel restrictions and relaxation of entry conditions.”

The International Airline Association's central forecast for 2021 is for a 50 per cent improvement on 2020 demand, which would bring the industry to half of 2019 demand levels. Asia has been leading a rebound, followed by the United States, with Europe lagging.

But Datalex doesn’t have the luxury of waiting for a full recovery to take hold to go about raising cash. With the Desmond loans carrying a 10 per cent annual rolled-up interest cost, the €11.3 million loan has already turned into a €16 million debt.

Repaying this liability is paramount, even if Desmond has shown huge patience – or financial nous, depending on your point of view – by extending the repayment deadline twice, most recently to September 2022.

Debacle

Corkery, parachuted into Datalex in 2019 as part of a management and board overhaul in the wake of the accounting debacle, has predicted the company is well placed to benefit as digital sales are expected lead a recovery in airlines’ passenger bookings and carriers cut back on building their bespoke IT systems to use software companies’ products.

Cantor Fitzgerald analyst Ian Hunter said the new management team's move to refocus the business as a "cloud based" software-as-a-service company – with software delivery and licensing carried out by online subscription rather than contractors being deployed to install it on individual computers – will only help Datalex and its airline customers.

Datalex’s new products which allow airlines to push ancillary revenues and “make the right offer to the right customer at the right time” are generating “significant interest and have the potential to be differentiators in the market”, said Hunter.

Corkery told The Irish Times five weeks’ ago that Datalex had seen “a lot” of requests for proposals in the market from airlines looking to boost their digital offering and returns. Still, carriers were taking their time making actual decisions, he said.

If Datalex is to capitalise on opportunities, it will need to show potential partners that it has a solid balance sheet. The leftover proceeds from the share sale, together with about €3 million of cash on the balance sheet as of the end of 2020, would bring net cash to about €11 million.

Steps

The Datalex equity raise involves three steps. Firstly, Desmond, who owns a 29.8 per cent stake, having been a shareholder from before the company's 2000 flotation, has come together with investor Nick Furlong and his Pageant Holdings vehicle to buy €14.7 million of new stock as so-called cornerstone investors in the share sale.

The remainder is being raised by way of a €4.2 million stock market share placing, which was locked in on Friday, and a further €6.1 million on offer to existing shareholders over the next three weeks. Datalex’s brokers, Goodbody Stockbrokers, found conditional buyers for most of these shares on Friday, if demand from existing investors isn’t enough.

While share placings normally take place a discount, Datalex’s board has signalled a level of confidence by deciding to offer the new stock at the level of Thursday’s closing price: 50 cent a share.

Ordinary shareholders considering stumping up for shares in the cash call may take comfort from the fact that Desmond – who, as Datalex’s main creditor, has access to more financial information than most – sees upside in effectively converting most of what he is owed by the company into an equity stake.

Stake

But in the rush to get rid of the Desmond loans, Datalex has structured the equity raise in a way that will actually see the billionaire’s stake rise to about 40 per cent.

This puts him in an even stronger position in the cockpit when it comes to determining the future of a business that has long been surrounded – even in its darkest days in recent years – by takeover whispers.

Meanwhile, Desmond has agreed to keep the additional €10 million credit line available for Datalex until the end of 2022, should the company need more cash.

But with any drawdowns on this also facing a 10 per cent interest rate, Corkery would want to replace the facility with something cheaper if he is to prove to customers and the market that equity raise has done its job.