Just catching up on coverage of the news flow for EML and saw there were at least three articles in todays AFR on this including:
EML ousts CEO, appoints Barrenjoey to sell ‘all or part’ of business
Activist turns EML on its head in just five months
The Chook's article probably summarises it best ...
It’s astonishing how quickly an activist investor with barely a 10 per cent stake can turn a company’s strategy, board and management team on its head.
This time last year it was Mike Cannon-Brookes’ Grok taking on AGL Energy, in a stoush that ended with a cancelled demerger, new board, new chairman and new CEO.
Grok did it with an 11.28 per cent stake, initially held in shares and derivatives.
Now it’s Texas-based Alta Fox Capital, another newcomer to the Australian activist scene, that has gone after prepaid cards business EML Payments.
Alta Fox started buying shares on November 1 last year, and built an 8.14 per cent stake across the Australian summer.
Only 168 days since that first trade, EML Payments’ board has ripped up the company’s strategy, replaced the CEO and called in the bankers to consider selling the business and/or its parts as announced on Monday morning.
The announcement was signed off by a new board put together only two months ago and including Alta Fox founder Connor Haley, an American, and former UBS banker and Afterpay CFO Luke Bortoli who is now EML Payments chairman.
The new crew also includes investment bank Barrenjoey, tasked with the strategic review.
Alta Fox track record
It’s about as wholesale as changes at a company can get, and largely sparked by Alta Fox, a small investment manager that targets underperforming companies, management teams and boards.
The situation shows it doesn’t take much to get an activist campaign going. The activists are good at picking targets, and sometimes even an 8 per cent stake is more than is needed. Once a campaign gains traction, it’s hard to stop.
Alta Fox has made a business of it. The firm has gone after US-listed toys and games maker Hasbro and digital billboards group Daktronics in the past 12 months with mixed success, and now ASX-listed EML Payments.
It fishes in small caps globally, moving quickly once buying in and often uses M&A to create value. It claims to have made about 30 per cent a year (net of fees) since inception five years ago, with its biggest winners including Swedish group Enlabs and US small-cap Collectors Universe. Both Enlabs and Collectors Universe were sold.
While it’s one thing to turn up and demand changes, it’s another to make money for shareholders. EML Payments has performed terribly for investors, with its shares down 77.8 per cent in the past year and nearly 50 per cent in the past five years.
Task No. 1 for EML’s new interim CEO Kevin Murphy, a former Bank of Ireland cards business executive, is getting on top of regulatory issues that have dogged the company for the past two years. It has underlying anti-money laundering/KYC issues, and the Central Bank of Ireland on its back.
The new board, together since February, has come in with a three-point plan for EML: strategy, leadership and focus on remediation (specifically talks with the regulator in Ireland).
The strategy has shifted to short-term in nature – resetting to focus on today’s issues, not aspirations for the long term – and should be pretty simple; offload or shutdown the trouble PFS business (the one with the regulatory issues), if possible, and allow EML and its shareholders to focus on the group’s three strong business units. The leadership change has happened.
While Murphy deals with the regulator, Barrenjoey’s bankers will try to drum up interest in the company and/or its assets. EML Payments has attracted serious interest from the likes of Bain Capital and Canada’s Nuvei Corp in the past year or two, but couldn’t agree on terms, often pushing suitors for unrealistic prices.
M&A’s expected to feature heavily in Alta Fox’s playbook at EML which for now at least seems to be in sync with chairman Bortoli and the wider board. Alta Fox sees EML as a conglomerate of payments businesses, the crown jewel of which is the gift and incentive business that’s big in Australia and offshore.
Management change
Ironically, it was M&A that turned Alta Fox off the ASX-listed payments company when it first invested a few years. Alta Fox had a small position in 2019, but sold out after EML bought Europe-based Prepaid Financial Services (Ireland) Ltd for more than $400 million.
EML popped back up on Alta Fox’s radar mid last year, when it became apparent multiple suitors were sniffing around the business. At the same time most listed fund managers had given up on the story, unable or unwilling to deal with EML’s regulatory problems.
Having started buying shares last November, Alta Fox used its still small stake to vote against resolutions at the payments’ company’s AGM on November 25. Chairman Peter Martin was not re-elected, while there was a 29 per cent vote against the remuneration report.
Alta Fox disclosed a substantial stake three days later.
EML Payments’ board has turned over since, with three new directors joining two incumbents. The next task was the company’s strategy and management, with Alta Fox concerned by the way the former board had appointed CEO Emma Shand last year, and the company’s strategy.
In the new board’s eyes, EML needed a “wartime CEO” – someone to get in the weeds, make tough decisions and deal with its regulatory issues.
It is understood EML tried to hire Murphy a few years ago – and the new brigade is confident he shouldn’t take too long to get his head around the business.
Murphy, appointed on an interim basis, was said to have “a deep understanding of the global payments industry”, “significant regulatory experience (including with the Central Bank of Ireland)” and “been involved in several successful business turnaround scenarios for private equity funds” in the board’s statement to shareholders. He’s a bit of an unknown quantity for local investors.
EML’s former long-time CEO Tom Cregan remains a significant shareholder, but is on the sidelines. He’s not connected to Alta Fox or the company’s new board.
There’re plenty of moving parts, and much talk of widespread change that could take months to play out.
Still, investors liked what they saw on Monday, pushing EML Payments shares up 13.9 per cent to 66¢. It will be a long way back to $5 plus, where the stock traded only two years ago, while it is worth remembering that activist Alta Fox’s entry price is in the 50-60¢ a share range.
DISC: (now) microscopic position held in RL and SM
