Alfa Financial Software/EQT: six little tech companies could become five

Then there were six. Though not literally a horror mystery, the disappearance of listed UK technology companies worries some. The FTSE All Share Software index has just six members, the fewest in at least 15 years. Another might soon vanish from the stock exchange.

Alfa Financial Software, worth £580mn, has attracted the attention of Swedish private equity group EQT. It is negotiating a deal with Alfa’s largest shareholder and the holding company of its founder Andrew Page, according to a release from CHP Software and Consulting. This followed rumours of a deal earlier this month.

EQT has until early July to finalise an offer. If it does, CHP Software, which holds 60 per cent of Alfa’s shares, has committed to a deal with EQT at 208p per share worth £609mn. A clause would allow CHP to favour a competing bid at 239p per share.

Alfa looks small but it has some attractive qualities. Under Page’s leadership, Alfa has become a leader in asset financing software. Sales rose 20 per cent year on year in the first quarter of the year. It competes against big enterprise software groups such as SAP, Oracle and financials specialist Fiserv. Any of them might also want to bring Alfa into their fold. 

But to do so, a rival bidder would need to pay a generous price. The putative 208p-per-share offer already values Alfa at 5.8 times its forward 12-month sales, according to Refinitiv data. That beats Germany’s SAP, trading on 4.4 times. At 239p per share, the multiple rises to 6.7 times, which approaches US sector valuations. The S&P 500 software index is on 9 times forward sales. 

Yet at that higher price, a buyer would need to believe that Alfa could increase earnings per share growth well above current forecasts of 33 per cent by 2025. Even then, Alfa would carry an unattractive price/earnings to growth (PEG) ratio of 6.

That might explain the share price reaction on the day. Traders may doubt any rival offers or even one from EQT. Alfa’s share price on Wednesday rose only 5 per cent to 198p, below the potential offer price. That suggests minority shareholders should not be too greedy themselves.