Reckon gets busy with Document Management demerger

Reckon yesterday released further details on the demerger and spinoff of its Document Management division.

Renamed GetBusy, Reckon shareholders will receive one GetBusy share for each three Reckon shares they hold (rounded down) at the close of trading on 12 July (see Table 1).

The spinoff will take the form of a demerger dividend and, subject to the ATO releasing a Class Ruling, won't be a CGT event. 98% of the demerger dividend will be non-assessable with the remainder assessable.

GetBusy will list on the AIM market of the London Stock Exchange on 4 August. The company is being listed in London because the vast majority of its customers are in the United Kingdom and United States.

Unfortunately, GetBusy shares will not be dual-listed on the ASX and so you will need to ensure your current brokerage account is set up to be able to trade on AIM or open an account with a broker that can.

Unless you wish to receive paper share certificates, you'll also need to complete a CREST details form once it is available on Reckon's website or by contacting and requesting the form from Computershare and return it to Computershare by 26 July.

GetBusy rights issue

Those holding Reckon shares at the close of trading on 12 July can also elect to participate in a pro-rata non-renounceable rights issue in GetBusy on the basis of 20 GetBusy shares for every 213 Reckon shares they hold.

GetBusy will be demerged essentially debt-free and with no cash, hence the rights issue. The $5.1m raised will be used to expand marketing and sales efforts and to continue developing its products.

The rights issue price will be $0.48 per GetBusy share, a 9.36% discount to the company's pre money valuation for GetBusy of $0.53 per share or around $20m.

While fast-growing businesses are always hard to value, particularly those investing their earnings to help grow, we value GetBusy at around $50m based on comparable software-as-a-service companies growing at similar rates. 

GetBusy is growing quickly as it entices more customers to use its two document management products SmartVault and Virtual Cabinet. On a pro forma basis – that is, assuming SmartVault which owned in 2015 (it was acquired in January 2016) – revenue grew 22% in 2016, with 82% of it recurring.

However, the company continues to invest heavily in developing its products, including its new Secure Communication and Information Management (SCIM) product.

SCIM will target the small, medium and enterprise-sized markets and seek to leverage GetBusy's existing customer base by combining document management with other communication functions including messaging, quotes, invoices, capturing tasks and so on.

Reckon will continue to distribute GetBusy products while GetBusy will maintain integration and ongoing support of its products to Reckon clients.

SmartVault, Virtual Cabinet and SCIM have large addressable markets but are still very early in their life-cycles and operate in highly competitive spaces. With significant future development expenditure likely, further capital raisings are also probable.

Reckon chief executive Clive Rabie, major Reckon shareholder Greg Wilkinson and GetBusy chief executive Daniel Rabie intend to take up all their rights while also fully underwriting the rights issue.

We also note that the company has expensed all GetBusy's development expenditure in the presentation accompanying the demerger announcement, thereby depressing earnings before interest, tax, depreciation and amortisation, even though development expenditure is capitalised and amortised in the accounts.

Along with the fact that the demerger seems to have been structured to actively discourage Australian investors from taking up their rights, this suggests GetBusy may be of interest for those willing to hold AIM-listed shares.

Please note that the demerger and rights issue is contingent on GetBusy listing on AIM and, assuming it does, we won't be covering GetBusy once it lists. 

Legacy Reckon

While Reckon will lose its fastest growing business, GetBusy's development and new market costs will also go and so its underlying earnings and cash flows should become more apparent.

Reckon still owns its Practice Management division which includes its Reckon APS and Elite software. These businesses offer practice management software for larger and small-to-mid-sized accounting firms respectively. Reckon APS is the best business in Reckon's portfolio and now has four out of the top five accounting firms in Australia and 70 out of the top 100 firms in Australasia as customers.

While there remains the threat of encroachment by Xero and MYOB, the critical nature of these systems mean switching costs remain high.

Unfortunately the demerger does nothing to address concerns over Reckon's Business division, which competes against Xero and MYOB in small business accounting software. Yet this division still earned $17m in underlying earnings before interest and tax in 2016 and is deliberately – perhaps because it has no other choice – pursuing a low-cost competitive strategy in small business accounting.

This will keep development costs lower than they otherwise would be. Moreover, as noted previously, this division's 39,000 online customers and potentially the 100,000 to 150,000 customers that are estimated to still use its desktop products may be attractive to an acquirer. These customers could be transferred to any purchaser's products at a lower cost than having to acquire them individually. Any deal would also remove the low-cost competitor in the small business accounting space, thereby potentially improving the profitability of remaining competitors.

Downgrading to Hold

With Reckon shares around our current Buy price and going ex-dividend on 11 July, we're downgrading to Hold and removing the price guide until the company goes ex-dividend. We'll update our recommendation and reinsert the price guide once it does.

Members who don't want to own GetBusy shares once it lists on AIM have until close of trading on 10 July to sell their Reckon shares with the entitlement to the demerger dividend and rights issue attached. HOLD.

Note: The InvestSMART Smaller Companies Fund (which should be available for investment within the next few months) owns shares in Reckon. While the fund's mandate allows it to hold GetBusy shares, as an investment in GetBusy is highly speculative we don't believe it is a suitable investment for the Fund. So, contingent on Reckon's subsequent share price movements, the Fund intends to sell its Reckon shares before they go ex-dividend and buy them back after Reckon goes ex-dividend.

Disclosure: the author owns shares in Reckon and intends to take up his GetBusy rights.