A new technology play is set to make its debut on Canadian markets, as Constellation Software Inc. takes steps to ramp up the pace and scale of its acquisition-focused growth strategy by spinning off European subsidiary Topicus.com Inc.
Constellation announced plans this week to list shares in its Netherlands-based subsidiary on the Toronto Venture Exchange, creating a new public entity with 4,250 employees, 85 business units and a mandate to snap up rival European tech companies focused on health care, government and education software.
“Constellation believes that Topicus.com will grow more quickly and perform better as an independent public company than it would within Constellation,” RBC Dominion Securities analyst Paul Treiber said in a report. Earlier this year, Mr. Treiber estimated Constellation and Topicus.com will spend more than $650-million on acquisitions over the next 12 months.
Entrepreneur Mark Leonard founded Constellation in 1995 and has used takeovers to build one of the country’s largest tech companies, with a $32-billion market capitalization. Two of those deals in Holland created Topicus.com: The €240-million ($374.3-million) purchase of a company called Total Specific Solutions (TSS) in 2013, then the €217-million takeover of Topicus.com in May. Regulatory filings this week show the combined companies had sales of €518-million last year and analysts estimate Topicus.com’s equity value will be approximately €1.2-billion when it begins trading.
Mr. Leonard highlighted plans to preserve Topicus.com’s corporate culture by creating a new, freestanding company when Constellation announced it was buying the privately owned business in the spring. “The public listing is expected to afford our Netherlands-based businesses a platform from which to celebrate their culture and achievements,” Mr. Leonard said in a press release. “The plan to create a publicly listed operating group made up of Topicus and TSS was a key part of our discussions with the Topicus founders. They didn’t want their legacy disappearing into the craw of an omnivorous conglomerate.”
This is the first time Constellation has created a publicly listed subsidiary to expand its reach and analysts said it shows the company is willing to be flexible with its structure as it continues to grow. In a report, Scotia Capital analyst Paul Steep said: "Our take is that the Topicus acquisition demonstrates that Constellation can win against private equity competitors in situations where price isn’t the only consideration; Constellation is demonstrating its ability to use innovative and complex deal structuring to win over sellers.”
The planned spin-out will see existing Constellation shareholders receive 1.86 Topicus.com subordinated voting shares for each share they own, in the form of a dividend. Topicus.com will also issue preferred shares to Constellation that are convertible into its common shares on a one-for-one basis. Constellation will also own one “super voting share” in Topicus.com that entitles the parent company to 50.1 per cent of the votes, and Constellation will have the right to nominate six of the company’s 10 directors. The initial public offering requires approval from regulators and the stock exchange, and Constellation did not give a timetable on the transaction.
Analysts said the deal is complex, because of Constellation’s attempt to minimize the tax owed by its shareholders, but justified by the company’s track record. In a report, Scotia’s Mr. Steep said: “Our view is that the firm’s ongoing merger and acquisition activity over the past 12 months validates the steps that Constellation took in modifying the organizational structure to support an increased acquisition pace, with the firm having delivered a material increase in both acquisitions and total capital deployed over the past several years.”
When completed, the spinoff will see Constellation shareholders hold 30.4 per cent of Topicus.com subordinate voting shares, while the former owner of Total Specific Solutions holds 30.3 per cent and Topicus.com’s founders hold a 9-per-cent stake. The remainder of the company will be owned by Constellation through the preferred share issue.
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