ASX-listed software business EROAD has entered a trading halt as the New Zealand-based company seeks to raise $NZ50 million ($46 miIlion). However, the company’s biggest shareholder warned it won’t participate in the offer.

Volaris, which owns almost 18 per cent of EROAD, questioned why the company needs additional capital and such a deep discount.

“We question the urgency, need and terms of this capital raise,” a Volaris spokesperson said.

“If the EROAD Board believes that our NBIO [non-binding indicative offer] proposal price of $1.30 per share materially undervalues EROAD’s business, how can they now issue additional shares at $0.70 per share?

“EROAD said the capital would be used to strengthen its balance sheet, repay debt and providing fund its growth strategy, especially in the key North American market.

EROAD receives unsolicited, non-binding indicative proposal

EROAD Limited (NZX:ERD, ASX:ERD, “EROAD” or “the Company”) advises that it has today received an unsolicited, non-binding indicative proposal (“NBIO”) from Brillian APAC Pty Ltd (“Volaris”), part of the Volaris Group. The Volaris Group is an operating group of Toronto Stock Exchange-listed Constellation Software Inc. (TSX:CSU).

The NBIO from Volaris is seeking to acquire 100% of EROAD’s shares at a proposed price of $1.30 per share in cash noting its preferred approach is by way of a scheme of arrangement.

The NBIO is subject to a number of conditions, including due diligence on an exclusive basis, negotiation and execution of a scheme implementation agreement with customary terms and conditions, unanimous support from EROAD’s Board of Directors and approval from Volaris’ investment committee.

Volaris has also disclosed that it has acquired an interest of 17.734% of EROAD’s shares on issue with the most recent acquisition of 15,994,438 shares being at $1.30 per share with an agreed escalation payment to the sellers of these shares if within six months after the date on which the relevant escalation agreement was entered into, Volaris enters into a scheme of arrangement with EROAD at a higher price, or gives notice under rule 41 of the Takeovers Code of its intention to make a full takeover offer at a higher price.

EROAD’s Board of Directors has commenced a process to consider the NBIO alongside its advisors, Goldman Sachs as financial advisor and Chapman Tripp as legal advisor. The Board will act in what it considers to be the best interests of the Company and its shareholders, including assessing the merits of this NBIO from Volaris relative to the work underway on reviewing partnership options to contribute some combination of market access, expertise and capital to drive further growth in the North American market and other alternatives.

There is no certainty that the NBIO or the strategic review will result in any transaction. EROAD shareholders do not need to take any action at this time in relation to the NBIO by Volaris. The EROAD Board will continue to keep shareholders and the market informed of material developments.

EROAD are operating in a complex business domain with lots of key drivers for adoption including efficiency (fleet logistics, driving behaviour for fuel use, maintenance), safety and compliance (fatigue, speed, mass). The solutions require a combination of hardware, software and integrations to other systems including in-truck and enterprise systems. Heavy vehicles are becoming increasingly smart themselves and a lot of data is becoming available through integration to EROAD like the engine stats, mass, mechanical forces, wear etc. A bit like aircraft and trains. 

This is a very fragmented market with vendors offering point solutions creating data silos. It looks like EROAD are trying to be a one-stop-shop providing a unified solution with complete operational data. They are coming from a compliance focus which is the right business model IMHO because the big fleets will be most attracted to that.

Australia is VERY heavily regulated, perhaps the most regulated in the world with such long freight routes to manage (remember the Kempsey bus crash, 35 died), with NSW Transport doing a lot of that work being the main freight transit state. Also agencies like NHVR, TCA and NTC involved. Unless EROAD can integrate to the regulatory systems in each state to feed the monitoring data to the regulators (a legislative requirement to carry higher mass), it's going to be up hill for EROAD to get large fleets signed up in Australia. EROAD should buy a local vendor. 

The incumbents in Australia include Teletrack Navman, Netstar and Blackbox Control, but only Teletrac Navman is a real competitor in all areas. There are others like Optalert, and Easy to Use Pty Ltd but these are point solutions.  

The US market could be much simpler if they pick the right problem to solve, but there are lots of states to deal with. Perhaps they mostly have national laws (US DOT), so that might be OK. 

I have spoken to some of the R&D engineers at EROAD a few years ago and was impressed by them. At the time the NZ Transport Agency was installing monitoring cameras and in-road weigh stations (like we have in NSW) as part of the Weigh Right Programme and the heavy vehicle operators were being pressured to become reasonably compliant with heavy vehicle safety laws (i.e. use safety management systems). That Weigh Right is still not really operational yet because it is ambitious for a Government agency, but over time it will add to pressure on operators and the continued tailwinds for EROAD.    

I learnt that EROAD were one of the world leaders in Road User Charging and had one a significant contract in Oregon in the US. If electric vehicles are to pay the equivalent of a fuel tax, EROAD could be in the front seat. The US will be the main market that matters and EROAD have a good history there.  

From a technical point of view, I like EROAD but I can see they have a lot of complex execution ahead of them. But, the Kiwi's should never be under estimated. They would have the pick of the engineering talent over there which is a big advantage.  

This is not a rapid tech hyper growth like Xero. I think this will be a slow upward trending business as they execute.