At the moment technology companies are flying high, with the ‘Magnificent Seven’ big tech companies influencing nearly every person on the planet. A story from the Hebrides tells of a contest between an eagle and a wren over who could fly higher.
The eagle, a powerful bird, flapped and flapped higher in the sky, but could always hear the wren’s voice saying that it was above him. The eagle reached the limit of its endurance, and just before the eagle hit exhaustion, the wren, who had piggy-backed on the eagle in his ascent, hopped off and fluttered away, flying higher than the eagle.
Team Internet Group (TIG) [LON:TIG], formerly known as CentralNic LON:CNIC, the AIM-listed software and computer services company has flown high on the back of the tech boom. It has grown significantly over the past few years and became a constituent of both the AIM50 and AIM100 indices. The group had annually doubled in size in six out of the past seven years through a combination of organic growth, winning new clients, and by acquisitions.
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In its last results, Team Internet’s CEO, Michael Riedl said: “Team Internet has delivered a resilient performance in our core businesses within a dynamic market environment and the group is poised to maintain record levels of profitability […] With our ongoing commitment to innovation and operational excellence, we are well-positioned to return to higher growth in profit and cash flow.”
The company saw its gross revenue for the nine-months to end-September up 4% to $143.6m but after a previous slew of positive results, reported a 7% fall in profit after tax year-on-year to $11.9m. Nevertheless, Riedl remained bullish on the internet advertising company’s prospects, saying: “The group remains on track to produce record profits in 2024 and 2025, albeit at more moderate growth rates than originally anticipated. [We] now expect to deliver approximately $97m adjusted EBITDA for 2024.”
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Riedl’s confidence seemed to be well-placed as in January the company received two takeover bids from TowerBrook Capital Partners and Verdane Fund Managers of 125p/share in cash, valuing the company at around £315m. The bids also include an option for shareholders to choose an unlisted equity alternative.
Undervalued bids rejected by management
TIG had previously rejected approaches from both bidders, deeming them to undervalue the company and after the offers became public TIG’s share price jumped to 118p, up more than 37% on the previous day’s trading.
There is another story, this time from Greek mythology, about a young man called Icarus. He and his father were imprisoned in a tower in Crete by the tyrant, King Minos. The two of them concocted a daring escape plan, cobbling together a set of wings from old seagull feathers, leather straps from their sandals and beeswax. When they were ready to escape, Icarus’ father warned his son to fly straight, especially not too high.
However, in his exuberance Icarus ignored his father’s advice and, in his giddiness, decided he would try and fly to the sun. Sadly, for Icarus, the beeswax that was holding his wings together started melting, his feathers came loose, and he plunged into the sea and drowned. Icarus’ story is often held up as a warning against hubris and excessive ambition.
TIG trading update
By the beginning of February TowerBrook had withdrawn its offer. A day after, TIG released a trading update reporting that it expected gross revenue for the financial year to fall from $837m in 2023 to $803m. The company also said it was expecting a y-o-y fall in net revenue of $3m and that earnings would fall from $96m to $92m. Moreover, net debt ballooned from $74m to £94m over the year after TIG completed a $21m share buyback, paid out $10m in dividends and completed $32m of acquisitions.
Earlier this week Verdane also withdrew from the process. Stock market rules bar these companies from making another offer for six-months. That’s not to say that they won’t come back for TIG, but as President Zelenskyy of Ukraine found in the Oval Office last week, negotiating from a position of weakness rarely leads to an equitable deal.
TIG also has a key challenge looming on the horizon as Google is phasing-out AdSense for Domains (AFD) from March 2025, which will push advertisers towards Google’s new monetisation platform, Related Search on Content (RSOC). This change could well have a significant impact on revenues for TIG, and its management has warned that it will see a dip in revenue as it builds the transition from AFD to RSOC into its models.
Despite RSOC and the withdrawal of its suitors, TIG is still a profitable and cash-generative business and has said that it plans to use its strong cash flows to reduce debt, return money to shareholders through dividends and buybacks, or a combination of both.
On news of Verdane withdrawing its offer, TIG’s shares plunged from 98.6p to 59p, a 40% fall, and at lunchtime on 4th March were trading around 57p. TIG has a market cap of £245m. This could provide a buying opportunity, last year the company was trading above £2 and there are sure to be suitors waiting in the wings (hopefully not held together with wax and feathers) as the tech sector consolidates. The company remains ‘One to Watch’ but on a slightly different brief to two-years ago.
