TORONTO, ONTARIO--(Marketwired - Dec 16, 2013) - Constellation Software Inc. ("Constellation" or "CSI") (CSU.TO) announced today that it has released a letter to shareholders from President Mark Leonard for the purpose of providing shareholders additional information with respect to the proposed acquisition of Total Specific Solutions (TSS) B.V. announced earlier today.
Constellation Software Inc.
TO OUR SHAREHOLDERS
I, along with a number of the members of the company's Board of Directors are concerned that the acquisition of Total Specific Solutions (TSS) B.V. ("TSS") may generate some confusion amongst our shareholders. It is much larger (approximately a EUR240 million purchase price) than our normal acquisitions, and that price is a higher multiple of Net Maintenance Revenue (2.65 times) than we usually pay. Through this acquisition, we are acquiring a collection of businesses that is similar to CSI, and that will initially be financed with debt at a time when debt is very inexpensive. At first blush, it should, as the equity analysts like to say, be accretive. Nevertheless, there are characteristics of both the investment and the planned financing that aren't immediately obvious.
While TSS is composed primarily of businesses similar to those that we own in North America, there are some significant differences. Most obviously, they are not in North America. Constellation has not covered itself with glory outside of North America. In some instances we have acquired well, but with the exception of one outlier, our average returns on invested capital outside of North America have been lower than inside North America. Despite the cultural differences and higher social costs, our sense is that there are no fundamental reasons for permanently inferior returns when we operate abroad. We have yet to prove that to ourselves.
Within the TSS group there are some businesses that don't build their own vertical market software ("VMS"). I've noted in many markets with limited numbers of customers, that VMS businesses tend to have a higher proportion of professional services revenues, and a greater dependence upon third party software platforms. Some of the TSS businesses certainly fall into this category. Others TSS subsidiaries have no VMS component at all. Over the long haul, both of these business types are likely to generate lower operating margins than their pure VMS siblings. Canadian securities laws require that we file a Business Acquisition Report ("BAR") within 75 days of completing a significant acquisition. Our TSS BAR will outline in further detail the historical results of the company and its constituent businesses and, once filed, will be available at www.sedar.com.
We expect that TSS will be our first acquisition that is financed on a stand-alone basis. As I explained in the last President's Letter to Shareholders, a number of private equity firms have successfully built portfolios of large VMS businesses using highly leveraged capital structures. They have effectively priced us out of the market for most large VMS transactions. We are planning to adopt some of their financing tactics with the TSS acquisition. We are in discussions with a number of Dutch and European financial institutions about providing stand-alone debt financing for TSS to replace the temporary financing that we've arranged through our existing syndicate of lenders in Canada. We are also in discussions with potential equity partners about taking a significant minority stake in the TSS investment. We believe that this combination of financing techniques has the potential to allow us to generate an after tax cash on cash return on CSI's ultimate investment in TSS that is comparable to that which we generate on our other investments.
Institutionally, CSI stands to learn a lot about doing business abroad, and about the impact on a business of financial leverage. At least for a while, we will present the TSS financial results separately within the CSI quarterly financial statements so that our shareholders can form their own opinions regarding our continued participation in larger, financially-leveraged acquisitions.
Mark Leonard, President
December 16th, 2013
Constellation Software Inc.
Certain statements herein may be "forward looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Constellation or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Forward looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly from the results discussed in the forward looking statements. These forward looking statements reflect current assumptions and expectations regarding future events and operating performance and are made as of the date hereof and Constellation assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances.