On August 30, RS2 Software plc announced that the major European Bank referred to in their company announcements of May 16 and June 19, which had expressed an interest in acquiring a significant stake in RS2, was Barclays Bank plc. The company also explained that Barclays agreed to acquire 4,250,000 RS2 shares (equivalent to 10 per cent of the issued share capital) from Information Technology Management Holding Limited (ITM) at a pre-agreed price of €1.22 per share.
The agreement was part of a wider transaction for Barclays to acquire up to 20 per cent of RS2.
After Barclays purchases the 10 per cent stake from ITM, it can purchase a maximum additional amount of a further 10 per cent from the shares listed on the Malta Stock Exchange, held by institutional and retail investors.
RS2 also revealed on August 30 that the recently awarded £8.5 million licence agreement was also concluded with Barclays.
Following the announcement and ahead of the extraordinary general meeting (EGM) scheduled for October 2 2013, RS2 held a meeting for members of the financial community.
The CEO of RS2 Radi El Haj, who is also the majority shareholder through ITM, gave a detailed background of how discussions developed with Barclays Bank.
The CEO explained that Barclays had issued a ‘request for proposals’ for their card management system in 2012 and RS2 had to compete with large global firms for the licence agreement. After a very thorough review process, RS2’s Bankworks platform was selected in view of its capability.
Mr El Haj explained that the £8.5 million agreement relates to the billing and settlement business of Barclays. The CEO also clarified that the fee of £8.5 million indicated in the agreement is purely for the licence and there is additional revenue that will be generated by RS2.
Under normal circumstances, implementation fees could range between 20 per cent and 30 per cent of the value of the licence and once the platform is successfully set up, maintenance fees will kick in, amounting to between 18 per cent to 23 per cent of the licence amount on an annual basis.
Mr El Haj provided further details on the Bankworks licensing model and explained that clients may either opt for a global licence or one that is restricted to a certain jurisdiction. In the latter, other licence agreements would be required if the client wishes to use the Bankworks platforms in different jurisdictions.
The CEO explained that the signing of the licence agreement with Barclays was conditional on the share acquisition.
He stated that their investment of up to 20 per cent in the company is a strong sign of confidence in RS2 and is being well received by RS2’s clients.
In response to questions from some of the financial analysts present for the meeting, Mr El Haj argued that the strategic shareholding by Barclays in RS2 should not jeopardise future potential licence agreements with other Tier 1 banks since contract negotiations involve stringent confidentiality agreements and no information will be available to Barclays.
The CEO also made reference to the agreed price of €1.22 for the transfer of the 10 per cent shareholding from ITM to Barclays. He indicated that when negotiations were taking place, the market price of RS2 shares was below €1.00.
He also explained that the price of €1.22 per share must not be seen in isolation but in a wider and longer-term context together with the beneficial impact of being associated with Barclays.
In fact, although at the time of the August 30th €1.22 announcement, RS2’s equity was trading at €1.645, the market reacted positively at the strategic relationship struck with such a strong global brand, helping the share price to rally by a further 13.7 per cent to a new all-time high of €1.87 on high levels of turnover, indicating improved liquidity in the equity of RS2 following the string of positive announcements over the past year.
RS2’s shareholders have now received notice of the convening of the EGM and a circular explaining the Barclays deal as well as the required changes to the memorandum and articles of association. One of the changes concerns an increase in the maximum number of directors on the Board from five to seven persons paving the way for a Barclays representative to be immediately appointed to the board if the EGM approves all resolutions and the transaction materialises.
The other major change relates to the increase in the number of votes required for a waiver of pre-emption rights from the current 75 per cent to 90 per cent in the event that the company proposes to increase the issued share capital.
The agreement with Barclays is a milestone not only for RS2 but also for the Malta Stock Exchange
The higher threshold indicates increased protection for shareholders from eventual dilution.
The explanation given by the RS2 chairman, Mario Schembri, in the circular, includes an important statement confirming that since the transaction between Barclays and RS2 is governed by the listing rules of the Malta Financial Services Authority, “Barclays will not be able to deal in the Company’s shares for a period of one year from completion of the transaction, other than in accordance with a limited derogation that has been granted by the Listing Authority in relation to dealing activities which do not constitute Proprietary Trading or Discretionary Investment management by Barclays”.
However, it is worth clarifying that in the same circular, the transaction is defined as the overall agreement for Barclays to acquire up to a 20 per cent shareholding in RS2.
As such, Barclays can immediately purchase an additional amount of a max of 4.25 million shares from the market. Barclays is therefore prohibited from increasing its shareholding beyond the 20 per cent level for 12 months.
RS2’s shareholders should do their best to attend the EGM scheduled for October 2 to hear about the company’s intended strategy going forward.
Shareholders may also seek an update regarding other business developments within the company. In this respect, the CEO indicated at the recent meeting with the financial community that licence negotiations are ongoing with customers in Europe, Latin America and also North America.
The agreement with Barclays is a milestone not only for RS2 but also for the Malta Stock Exchange. It would be interesting to hear whether the fact that RS2 had its equity listed on the Malta Stock Exchange was an important attribute during the negotiations.
A public listing is normally seen as a certificate of best practice procedures in many countries. If RS2’s listing on the MSE was instrumental in the negotiations, other companies which have the attributes to go public and list, should take good note of this.
Meanwhile, the authorities should leverage on this announcement by encouraging more companies to take the route of a public listing.
Other companies who are already listed on the MSE may also be positioning themselves to attract international suitors. Mergers or acquisitions are one of the most important drivers of activity across international stockmarkets.
This should not be overlooked by investors, especially where local companies have an international dimension.
Recent developments at RS2 also present a perfect case study for the wider investing public, showing the longer-term benefits of equity investing and the cost averaging technique.
The share price of RS2 has rallied strongly over the past 12 months, providing substantial capital gains to the patient investors who had acquired some shares in the Initial Public Offering in May 2008 and also to those who acquired shares in subsequent years when the equity had dropped below the IPO price.
The strong share price appreciation in RS2 should also encourage investors to consider some allocation to a variety of equities as part of their wider investment portfolio.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC, on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising from the use of all or any part thereof, and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.