PayGroup Limited enters into Scheme Implementation Agreement with global payroll company Deel, Inc. and Deel Australia Holdings Pty Ltd

• PayGroup Limited has entered into a Scheme Implementation Agreement with Deel, Inc. ("Deel") and Deel Australia Holdings Pty Ltd ("Deel Australia") under which Deel Australia will acquire 100% of PayGroup shares for a cash offer price of A$1.00 per share1, via a scheme of arrangement (“Scheme”)

• Deel is a leading global compliance and payroll solution with a presence in over 150 countries servicing more than 8,000 customers

• Cash offer price represents a 174.0% premium to the last closing price of $0.365, and a 172.4% premium to the 1-month VWAP $0.367

• The PayGroup Board unanimously recommends that shareholders vote in favour of the Scheme

• If approved, the Scheme is expected to complete in October 2022

I am a little disappointed this one never got its opportunity to play out. PYG had just hit its inflection point where all the hard work of acquiring, integrating and selling had been done and over the next 12 months was going to enjoy a mighty re-rate as the cash flowed in.

At $1.00 a share, the offer is just too good to turn down, and it will fly through. In these dark times it’s nice to occasionally get an unexpected bump to performance!

I forget which straw contributor posted about andy crebar's newsletter, but whoever it was "thank you".

For poeple intrested in SaaS companies listed on the ASX, I couldnt recommend him highly enough. He has a newsletter that one can subscribe to. I think you can just check it out without subscribing.

Here is his latest offering on PYG

At some point it would seem likely that he will launch a service or start charging, the quality is worth it.

Anyway, back to PYG, I was convinced enough, on a value basis, to buy a small parcel today. As he points out, the multiple is ridiculously low (EV/ARR ~=1x, for comparison IHR is on a valuation of 11x - it is growing at quite a different mutiple however) and the underlying organic growth  in ARR is reasonable enough @ ~25%. So there is a disconnect between what the market thinks is acquisition based growth and what is also organic growth. The dilution from cap raises has been outperformed by the improvement growth.

If I could offer a couple of areas that I do not think have attracted enough attention (and lets face it this guy is way better than me at this shit) - it would be these:

• the payback period is crappy. He pointed this out, but we should be looking for companies with <12 months for best-in-breed. PYG is 24months - and thats from pretty tortured data. It might be worse.
• Gross Margins are shithouse at 50%. I know that is great for most  companies, but for SaaS companies, it needs to be a lot higher to justify high multiples. Fortunately, PYG dont have a high multiple!
• The supposition that margins will improve. This is a two-edged sword. Firstly, they have outsourced much of their sales with a partnering program. So in the short term, the CAC will reduce significantly and margins should improve (they dont need to pay for lots of expensive sales staff to acquire new customers). Long term, these middlemen will be taking a cut, reducing the potential for really high margins. Realistically, given the cash balance, acquistion and dilution history, this seems like the correct option to take. But margins are never going to be up in the high 70s or 80s