Misys PLC MSY LN
December 22, 2008 - 9:27am EST by
gocanucks97
2008 2009
Price: 97.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 531 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I will keep the write-up short. Buying Misys (MSY LN) and shorting Allscripts (MDRX) will create a stub free on equity basis, for two profitable software divisions and at 2x EV/EBITDA and 0.9x EV/maintenance sales. You also have ValueAct who owns 25% of MSY, which should protect/unlock the value for shareholders.

Background: Misys is a UK software firm that had two divisions, finance (Banking, Treasury & Capital Markets), and healthcare. In Oct ’08, the company merged its healthcare division with US Based Allscripts and owns 54.5% of the new company.

Numbers: (MSY intraday, MDRX based on closing price on Friday).

MDRX

$9.49

Shares

152

MDRX Market Cap

$1,442

USD/GBP Exchange Rate

1.4832

MDRX Market Cap in GBP

£973

Misys Shares

£549

Misys stock price

£98

Misys Market Cap

£533

Misys ownership of MDRX

54.5%

Misys's MDRX Holding

£530

54.5% holding

Core banking / TCM

£3

Net Debt

£120

EV

£123

TTM

CY09

CY10

TCM+CB EBITA

54.5

60.5

66.7

Central Cost

-10

-10.0

-10.0

Interest

-10

-10.0

-10.0

PBT

34.5

40.5

46.7

Tax (@ 30%)

-10.4

-12.2

-14.0

Net Income

24.2

28.4

32.7

P/E

0.1

0.1

0.1

EV/EBITDA

2.3

2.0

1.8

Maint Sales

138.3

141.0

144.6

NI on Maint Stream

12.5

14.4

P/E (Maint Stream)

0.2

0.2

EV/Maint Sales

0.9

0.9

0.9

Why the opportunity: After the deal had closed, MDRX went up 90% while MSY went down 15%. It is not clear to me what drove this divergence. I can only speculate that 1) investors may have high hope for MDRX under a new democrat regime under Obama, 2) Russell 2000 index increased MDRX’s weighting. 3) investors were skeptical of the TCM/CB division with all the trouble circling the financials industry. I think 1) and 2) are largely short-term issues that are largely irrelevant once you create the stub. As for 3), I would note current valuation is already discounting an Armageddon case. 44% of the revenue of the TCM/CB division is maintenance revenue. For the last 5 fiscal years, the division had sales of 240M, 245M, 267M, 273M, 301M, and EBITA of 38M, 41M, 38M, 48M, 51M respectively. I will leave the readers to decide how much of a discount multiple Misys's legacy division should get (there are plenty of sell-side reports discussing the impact). Curiously, MYS has 4 buys, 9 holds, 5 sells, while MDRX has 7 buys, 11 Holds and no sells.

 

 

Catalyst

1) Both stocks are pretty liquid, so the valuation gap should eventually close.
2) ValueAct may force some additional corporate action.
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