Claranova — Simplifying the corporate structure

On 13 August, Claranova issued 2.14m new shares to two investment funds at a share price of €7.0 (the closing price on 10 August) resulting in proceeds of €15m. Details on the two investors:

In addition, HCM has invested in a €50m convertible bond. Terms of the bond are:

The table below shows the rights of the bond holders and the company to conversion or redemption of the bonds.

Prior to this share issue, the vast majority of shares were free float (92.8%), with a high ownership by retail investors. The remaining shareholders were executives, managers and directors of the company (6.6%) and the company (0.6%). Compared to similar sized companies, Claranova has much lower ownership by institutional investors, which has led to share price volatility. Adding two new institutional investors to the register should help bring some stability to the share price.

At the same time as announcing the investment in the company, Claranova announced that it was planning to acquire the minority interest in Avanquest. Claranova had originally attempted to do this towards the end of 2019 but was unable to obtain a quorum at the EGM called to approve the deal.

In July 2018, Avanquest SAS (100% owned by Claranova, holds all of Avanquest’s software businesses) acquired a 50.01% stake in Avanquest Canada (AC). AC owns Adaware, SodaPDF and Upclick. Due to the performance of the Avanquest division since then, the minority shareholders in AC have the right to exchange their 49.99% stake in AC for a 64.1% stake in Avanquest SAS. This means that although Claranova owns 100% of Avanquest SAS, which in turn owns 50.01% of AC, in reality, the minority shareholders effectively own 64.1% of Avanquest SAS. Avanquest SAS continues to be treated as a subsidiary rather than associate as Claranova has control over the activities of the division.

The buyout excludes the fintech operations held by AC (called Lastcard), these will continue to be owned jointly by Claranova and the AC minority shareholders. The deal is expected to complete on or before 30 September.

The buyout agreement values the equity of the Avanquest division at $180m/€153m, excluding Lastcard. Claranova will pay $115m (€98m) to acquire the minority interest broken down as follows:

This values the Avanquest division at c 1.7x our FY21e revenue forecast and c 15.1x our FY21e EBITDA forecast, slightly below the 2x multiple we had been using in our sum-of-parts valuation.

We note that the equity value of $180m/€153m compares to a value of c $163m/€147m when Claranova originally tried to buy the minority interests in late 2019. At that point we estimated that the minority interests had a right to 60% of Avanquest compared to 64% now.

Our normalised diluted EPS forecasts will be reduced by the issue of 4.1m shares and increased by the removal of the minority interest deduction for Avanquest (which we were forecasting at €5.7m for FY22); we estimate 10% accretion of normalised EPS in FY22 taking into account all of the transactions described above.

From a strategic perspective, Claranova will now have full control over the division, and from a shareholder perspective, the structure of the group will be simplified.

The table below shows the expected shareholder structure after all transactions are completed.

On 4 August, Claranova reported FY21 revenue of €472m, up 15% on a reported basis, 21% on a constant currency basis and 14% on an organic, constant currency basis. Organic growth includes Personal Creations for August to June in both years (it was acquired on 2 August 2019) and excludes any contribution from CafePress (acquired on 1 September 2020).

Q421 revenue was 11% below our forecast, which resulted in FY21 revenue 2% below our forecast. This was the result of several factors: a strong euro versus the dollar during the quarter and an easing in online commerce in Q421 compared to the high levels in Q420 when much of the world was in lockdown.

PlanetArt reported a 4% decline in revenue y-o-y in Q421, with a 7% decline on an organic, constant currency basis. For FY21, it grew 21% with constant currency, organic growth of 18%. The company noted that Personal Creations saw like-for-like growth of 20% in FY21. We had not anticipated this slowdown in Q421, hence our forecasts were €10m higher for Q421/FY21.

As a reminder, in Q420, PlanetArt saw strong revenue growth (+80% y-o-y, +53% organic constant currency y-o-y, +57% q-o-q) boosted by the number of people stuck at home during lockdown. As lockdowns have been lifted through the course of CQ2, this has reduced slightly the propensity to spend online. The company noted that it had continued with its strategy of moderating marketing spend in order to preserve profitability. It expects a gradual return to more robust growth in H122, dependent on COVID.

In July, PlanetArt announced that it had acquired certain assets of Minneapolis-based I See Me! from the McEvoy Group (www.iseeme.com). I See Me! publishes more than 60 personalised children’s books as well as other products for children such as colouring books, puzzles and growth charts. These can be customised via its website with information such as the child’s name and birthday. I See Me! had previously worked with Personal Creations, and PlanetArt highlighted the potential to leverage its broader product catalogue to create other customisable products for I See Me! customers. Financial details of the transaction were not disclosed.

Avanquest reported Q421 revenue growth of 3% y-o-y (reported and constant currency). For FY21, revenue declined 3% and was flat in constant currency. Q421 revenue was just 2% below our forecast. The division has now seen growth for the last two quarters, after three quarters of declines as it worked through the transition to subscription-based licensing. 78% of revenue from the three main software products in this division were from subscription licensing in FY21, up from 70% in FY20 and 50% in FY19. The company noted that SodaPDF and inPixio saw double-digit growth in the year. At the start of the year, the company changed its customer acquisition strategy for Adaware’s security solutions, which suppressed growth in H121. However, it returned to double-digit growth in Q421.

Post year-end, the division has launched two innovations in its software range. In July, Avanquest announced a new solution called SignPDF, targeting the self-employed and SMEs. This is a standalone digital signature solution that competes with solutions from DocuSign, HelloSign and Yousign. The solution launched in the US in July and will be launched in Europe in September.

Avanquest notes the performance of its PDF software over the last 12 months:

Also in July, Avanquest announced the roll-out of InPixio Photo Studio 11.5, which integrates AI photo editing tools for the first time. The new AI tools fully automate image processing, 15 times faster than previously available technology. For example, the tool will allow a user to cut out, remove or replace the background or sky in an image with a single click in just a few seconds. Users also still have the option to use manual editing capabilities, providing a combination of speed and flexibility. The tool was trained on tens of thousands of photos prior to launch, and the algorithm will improve as the number of users increases. InPixio has more than 10 million users worldwide.

The division saw a Q421 revenue decline of 35% y-o-y or 31% in constant currency. For FY21, revenue declined 20% or 14% in constant currency. FY20 included non-recurring revenue as part of the Sprint agreement; excluding this, revenue grew 24% in constant currency in FY21. The Sprint agreement has been extended to encompass the merger of Sprint and T-Mobile.

The company noted that it expects EBITDA (pre-IFRS 16) to nearly double for FY21 from €17.4m in FY20. It also noted that it has met the conditions to convert its $5m Paycheck Protection Program (PPP) loan to grant income. This will be recognised in H221 and is included in the EBITDA guidance. Management reiterated its target of achieving revenue of €700m and an EBITDA margin of 10% by FY23.

We have revised our forecasts to reflect the lower-than-expected Q421 revenues; this results in a reduction in revenue of 2.4% for FY21e. We have also reduced our FY21 EBITDA forecast as we were expecting it to more than double y-o-y (+109%). We assume a lower level of marketing spend for PlanetArt in FY22, resulting in lower revenue but higher EBITDA. We nudge up our Avanquest revenue forecast for FY22, reflecting reacceleration in growth now that the transition to the subscription model is complete; this drives slightly higher EBITDA. We have trimmed our myDevices revenue forecast for FY22 but maintain our EBITDA forecast as we assume costs will be managed in line with revenue. Our forecasts also reflect the recent investment in the company and the expected buyout of the Avanquest minority interests (assumed to complete on 30 September).

We have updated our sum-of-parts valuation to reflect the recent investment in the company and the expected buyout of the Avanquest minority interests. We have used the valuation of Avanquest implied by the deal rather than our previous sales-based multiple of 2.0x. The per share valuation decreases from €13.9 to €12.9, reflecting our reduced revenue forecasts for FY21 and the slightly lower than previously estimated valuation of Avanquest.