Tinexta S.p.A. (TNXT) Earnings Call Transcript & Summary

Good afternoon. This is the chorus call conference operator. Welcome, and thank you for joining the Tinexta conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Josef Mastragostino, Chief Investor Relations Officer. Please go ahead, sir.

Thank you, operator. Good morning, good afternoon. Thank you for joining Tinexta's conference call on the exercise of the call option on Defence Tech. Here with me today, Pier Andrea Chevallard, CEO of Tinexta; Oddone Pozzi, Group CFO. As a reminder, all the relevant documentation relating to the conference call can be downloaded from our company website. For the purpose of this call, Pier Andrea will provide some key strategic statements relating to the announced deal. I will go over the highlights in the form of an executive summary and Oddone instead, will go over the transaction details as well as all the other financials. The last part of the call will be dedicated to Q&A. A recording of this conference call will also be available on our company website, and it will be posted upon completion of this call. At this point, I will leave it to Pier Andrea.

Thank you, Josef. Good afternoon to all of you, and thank you for being here. I'm really delighted to announce the exercise of the call option on the reference shareholders for a total enterprise value of EUR 67 million. I believe this is a very important step forward for Tinexta's equity story as the sector remains extremely interesting and very promising. The important deal will allow Tinexta Group to increase its national presence by entering both the public administration and private enterprise segments, increasing the outreach of our cybersecurity operations in Italy. With this additional expansion, we are further consolidating our position and therefore, the market by becoming a key industrial player in the cybersecurity space in Italy. Defence Tech is an extremely strategic asset, and we are now exercising the corruption at a very attractive valuation, which makes the deal even more attractive also from an economic perspective. Obviously, following both Golden Power authorization and [indiscernible] from the reference of shareholders of the exercise price, Tinexta will adhere to the obligation of launching a mandatory tender offer. By entering Tinexta Group, Defence Tech will be able to further develop its high-value projects already in the pipeline as well as increased the know-how and offering of Tinexta Cyber. More in particular, we will be able to enter the national perimeter of the cybersecurity, which is an extremely important and distinguishing element that will allow us to be considered among a very selected group of companies. This will give us access to the world of cryptographic solutions for defense applications where the most advanced technologies are developed, tested and produced. As you all know, the Defence Tech has naturally security clearance status and this will guarantee the group not only a preferred access to the public administration channel, but also the opportunity to expand and offer its services to a larger share of clients. Going further, Defence Tech is a series of proprietary cyber products, they will further enhance the product offering of Tinexta Cyber, in particular for dual use application. Lastly, we are very excited for this decision and believe very strongly in the strengthening of our cyber pole in Italy, which paves the way for possible future collaboration with all the other areas of our business. I leave now the floor to Josef and Oddone to provide you with further details on the transaction. Thank you very much.

Thank you, Pier Andrea. Turning to Page 4 of the presentation. We have a recap of Defence Tech's announced results from a revenue perspective in 2023, they reached EUR 22 million, growing 1.4% versus the prior year. On an EBITDA adjusted basis in 2023, they grew 11.9% at EUR 9 million. I think it's important to highlight the key strategic margin, which is north of 40%. As a background information, we had presented, obviously, public information related to Defence Tech already in -- when we announced the call option back in December of '22. As you might recall, in April of '23, we did the closing of 20% minority stake in Defence Tech. The company was established in Rome, back in 2010, the company creates and certifies all systems for the management of classified information aimed at protecting critical infrastructure. Now as of today, on the bottom right of the slide, you can see what is the actual equity value of the call option, which considers for 100% consideration, a payment of EUR 62.3 million. Now going to Page 5, just to clarify to all investors and shareholders and analysts who's buying what, in this case, we remind everybody that it is the cybersecurity business unit that is buying, therefore, via a vehicle and exercising the so-called call option that we described today. The initial stake was purchased, as we said, closed in April 2023. And the price for the option was already set on 2023 EBITDA adjusted basis, times a multiple of 12 plus the pro forma adjusted net financial position. Pier and Oddone will definitely go over all the details. The enterprise value relating to the call option is equal to EUR 67.2 million. Moving on to Page 6. So today, the Board of Directors of Tinexta S.p.A. has decided to exercise the call option on Defence Tech for EUR 2.44 per share or EUR 24.9 million. Describing the deal and the structure, as a reminder, on December 29, 2022, Tinexta had signed a binding agreement to purchase 20% stake of Defence Tech Holding S.p.A via a wholly-owned vehicle called Tinexta Defence. The purchase of a minority stake, as you might recall, was priced at EUR 4.9 per share. On June 21, which is today, Tinexta exercised the call option on 40.09% of the share capital, relating to the selling shareholders. As a reminder, the selling shareholders are Comunimpresa and GE.DA, Europe. The call option price, as we said, is equivalent to adjusted EBITDA of 2023 basis, 12x plus proforma adjusted NFP. In terms of next steps, Pier Andrea highlighted, but we want to stress the point that the transfer shareholding covered by the Tinexta Call is subject to Golden Power authorization as well as the process of verifying the exercise price of the Tinexta Call by the selling shareholders. Following the transfer of the shareholder, the Vehicle Tinexta would hold, again, I'll precise, would hold 60.09% of the share capital of Defence Tech and this will consequently trigger a takeover bid or a public offer to be launched on the whole share capital not owned. As a reminder, following the launch of the takeover bid, the current shareholders Starlife, comprises the company's management had already expressed its intention to, a, tender a portion of the shareholding representing about 3% of the issuers share in acceptance to the offer. And following the completion of a successful offer confirm the residual portion of the issuer shareholder in Tinexta Defence. As a result of the transfer in the event of a successful tender offer, Tinexta Defence would be hold -- will be held by Tinexta as well as Starlife. There is also a throughput call option in place between Tinexta and Starlife regarding Starlife's stake in Tinexta Defence, which is exercisable by 2029 to be settled in cash at fair market value. Again, call option value, 100% of the equity value is EUR 62.3 million or equivalent to EUR 2.44 per share. Tinexta also estimates that the industrial and commercial synergies obtained at a group level will be able to generate, when fully operational, an additional EBITDA of approximately EUR 2 million. Finance is already in place to fulfill both the call option and potential takeover, Oddone will give you all the details in a bit. Turning to Page 7. We all remind the market that we are exercising this call because there's a strategic rationale behind it to add value. And that means enlarging the overall integration of services and infrastructure, strengthened at the advisory part of cybersecurity as well as the managed security services. Pier Andrea highlighted a very important aspect, which is expand the company's presence in the public administration market, consolidate the presence in the government sector, given that DTH, Defence Tech, is a partner of strategic importance to all national security. And this is a very important element because there's only a few selected number of companies. The acquisition is also strategic in terms of customer package because we will expand the overall customer package for the entire group. Turning to Page 8. This is a reminder, primarily what Defence Tech is made of. As you might recall, there are 3 business areas: cybersecurity and technology, communication and microelectronics. The company has 4 operating centers in Naples, Taranto, La Spezia and Avezzano. The sectors are strategic by definition, and they are defence, space, transport, telecommunication and finance. At this point, I will turn it over to Oddone, which will go over to the transaction details and financials.

Thank you, Josef, good afternoon everybody. So let's move now to Page 10. And as envisaged since the early communication about the potential acquisition of the Defence Tech, this is a process in 3 steps. Prior to December 2022, the company was -- has a free float of around 28% with other different shareholders. Then when Tinexta acquired the first 20%, the free float went down to 22%, and there were remaining also other shareholders on top of the bid. Now with the exercise of the call, as pointed out from Josef, Tinexta will move up to 60.09%. The free float is going to remain to 22.37%. And the management is with Starlife will have 17.5%. So this is where we are now, as a step and Tinexta. So after having exercise of the call and we include also the process of approvals that were mentioned before, bought by Pier Andrea and Josef, we will be in a position to go through a mandatory Takeover Bid. After -- if the public offers will be completed, basically, as already anticipated by Josef, Tinexta and the company is going to be delisted. Tinexta will own around 85%, while Starlife would be in the range of 15%. The company, over the last 3 years, increased constantly both in terms of revenue and EBITDA. And the margins went up over the period up to 9%. Additionally, the net financial position went down, mainly driven by 2 things, the significant level of investment as well as the long -- the investment in working capital driven by the specific DSO of the industry and obviously, like I said, by the growth, internally. So the development of the company over the period includes also products. In 2019, the company was mainly focused on services. If we look at results of 2023, products account for almost 1/3 of the revenue. And obviously, this is changing a bit, the mix and the margin inside that as well as the level of CapEx. If we look at the clients and now we can say that the government portion remains, over the period, basically stable at 77%, while the corporate part went up to 23%. If we look at the perspective share around the market and our view on Defence Tech, we would expect the revenue to grow at a compound average rate of '24 to'26 in the range of 12%, with the margin being around 29%. The acquisition has already included in the first quarter, documentation of the group, the financing of the group -- of the acquisition will be done through a dedicated facility line as a part of club deal signed by Tinexta in April '24. So basically, we have the facility fully dedicated to this specific deal. Josef and Pier Andrea talked both about the evaluation of the call. This has been calculated like we said, as a multiple of adjusted EBITDA -- multiple of 12x of adjusted EBITDA 2023. Obviously, the adjusted EBITDA includes, also an agreement, which we signed with the seller that was taken in account some extra CapEx that could have been performed. On the net financial position adjusted at the end of '23 is negative by EUR 4.9 million. And also this is part of the agreement with the seller related to some specific part of the balance sheet. So we came to an equity value of around EUR 64 million with a cash out for Tinexta in the range of EUR 25 million. And the price per share, as already stated, both from Pier Andrea and Josef at EUR 2.44. Obviously, if you go through considering the valuation blended between the 2 different steps of our acquisition, the enterprise value on the EBITDA is around 10x. I leave it back to Josef for closing remarks.

Thank you, Oddone. So I'm on Slide 14, just to highlight 4 major closing remarks with the exercise of the call today. We are obviously going to further steps in terms of cybersecurity market in Italy with a very bold key strategic player. Another important highlight is the entrance in the national security, national perimeter of cybersecurity and the preferred access that, that will plan towards public administration. The M&A deal is accretive to the group, strengthening the marginality in the business unit. And lastly, we will leverage on scale for business model expansion, proprietary dual-use technology as mentioned by Pier Andrea, extremely important and the combined network for increase in sales and synergies, the synergies that we also announced today. At this point, I will ask the operator to open up any Q&A because there might be.

This is the Chorus Call conference operator. [Operator Instructions] The first question is from Federico Belluati of Kepler Cheuvreux.

My question is regarding the potential time line, especially regarding the Golden Power. Do you have an idea of how long it should take to the government to approve [ rental ] in your exercise? That's it from me.

We don't see any initial problem in getting the authorization of Golden Power. But they are supposed to give the authorization maximum in 60 days. We think it will be before.

The next question is from Diego Esteban of Stifel.

Okay. First of all, congratulations for the acquisition to the entire team. I have 2 questions. One of them is when you talk about proprietary solutions, do you mean, for example, that they develop their own software, which they can then sell. And then is there going to be any impact to the NFP of Tinexta from this acquisition as in for the remaining 40% that you see a need to acquire, just to kind of help, if you can give us some color on that.

So Diego, the answer is yes, it is software. It's important that our product line with this potential acquisition will increase significantly. So that is one of the key strategic assets. But yes, to answer your question, it is based on software. Then you had a question on NFP, right? Could you please repeat it? Is it on the 40%, what were you saying?

Yes. So my question was referring to, are you -- does to acquire the remaining 40%, should we also take into consideration any -- some kind of put-call options that might impact the NFP in the future or not?

What do you mean the impact? Should we take in consideration what -- digitize 40%?

Yes. So the acquisition of -- Yes, you should have some put-call options for the remaining 40%, such as when you have done with all the previous acquisitions of...

No, no, no, absolutely. We -- after having got -- went through the steps that we already mentioned, we are going -- we will go through a closing for acquiring the remaining 40% as mentioned.

So just to clarify, this is not like an acquisition of a company like we used to do, right? This is an acquisition of a stake, right? So the 40% would be paid upon surrendering the shares, full stop.

Great. And congrats again for the acquisition.

The next question is from Isacco Brambilla of Mediobanca.

Three quick questions from my side. First one is for Oddone, you mentioned the team of extra CapEx. Is this the only driver for the difference between the EUR 5.6 million EBITDA on which you base the calculation for [ bid ] and the EUR 9 million reported in 2023 by Defence Tech? So if you can elaborate a bit more on this and if you can confirm that going forward, once we will have to consolidate Defence Tech, we should take EUR 9 million as the base in terms of EBITDA contribution by Defence Tech into Tinexta perimeter. Second question is on the financing costs. In the presentation, you mentioned attractive spreads, if you can elaborate a bit more on this, just give a sense of the range of total cost of financing of the new facility lines. Last question is on potential full impact on NFP. Have you done any internal assessment of the total potential cash out in case of full acceptance of the tender offer where pro forma net financial position may lend?

Isacco, thank you for your question. Yes, obviously, it's a listed company. So we went through an agreement we had with the seller where obviously, as a normal protection, we decided together to having some adjustments based on potential variation in CapEx compared to what planned. So obviously, we took the balance sheet results and we applied what agreed on the CapEx, nothing different. So on a pro forma basis, I would say that if I should consolidate on a pro forma basis, Defence Tech on Tinexta would be at EUR 9 million, that's it. Obviously, this has adjusted EBITDA, obviously, not reported because the reported is slightly different. If we go to the financing, our financing is in the -- at Euribor 6 months plus, let's say, if -- when we will move above 2x, this will be around 200 bps. And then we are scaling down and scaling up at different state level as we already published in our Q1 report. If we move into if just -- we didn't -- I did not perform any evaluation of potential coal price because this is not the time to go into it. But so let's assume that if on a pro forma basis, we have to include the 63% of Defence Tech, we should be in the range of 2.2x, 2.3x the EBITDA at the end of '24. Then what is going to happen, that is depending, obviously, when will we -- the closing will occur we have some steps that have some uncertainty in terms of timing. You know the Golden Power, as you said, the check-in procedure that is due from the seller. So it depends how much in terms of EBITDA we brought. And on top on the net financial position, we will see when the mandatory takeover will take place. But any case, as already shared with the market, with the analysts or investors, one was already mentioned. We do not expect to go far north of 2x the EBITDA for the consolidated group, including Defence Tech. Then it depends on which percentage we will reach the -- what would be the core -- the core -- whatever. But not significantly north of 2.5x.

The next question is from Luigi De Bellis of Equita.

I have 3 questions. The first one is on the -- can you elaborate better on the procedure for the verifying the exercise price of the Tinexta call by the selling shareholders. So more color on the procedure for this verification? Second point -- second question. And do you expect the price of tender offer to be in line with the call option price or the adjusted price after the verification? Or do you expect to pay a premium for the control of the target? And the last question, sorry for bothering you on this, but can you give us more color on the main differences between your adjusted EBITDA and the one calculated by Defence Tech and also for the net financial position because there is a huge difference. What are these differences related to, which CapEx are they referring to?

If we move to the first question, the procedure, I would not say a procedure, we say it's a standard and normal process in every M&A deal. So we went through -- our advisers went through, and they just applied the agreement we had with the server. As I already mentioned, and I have no other details, we agreed we -- given a significant amount of CapEx in the historic trend of Defence Tech, we agreed between purchases and seller an amount as a limit. And then if the extra amount would have been in place, there was a ratio of data obtained, it's actually very, very simple, very clear, the figures of Defence Tech are what they are in the balance sheet. So there is nothing on this subject as already answered to Isacco. Second, the price of the tender offer is not on the table today. So only following the specific stock exchange rules, once all the steps will be completed, the Board of Tinexta will convene again and will come out with the price for exercise -- for the tender offer. So it's not a matter that I can go through today as -- following this procedure. For the net financial position, again, this year, we agreed with the seller that certain balance sheet position should have been treated as a grid between parties. And this is how we came to this net financial position of EUR 4.9 million. Again, the net finance is -- we fully reflect the net financial position. This is the net financial position. And so nothing has been changed.

[Operator Instructions] The next question is from Carlo Maritano of Intermonte.

I just have one question on the outlook for Defence Tech. So you indicate a 12% CAGR. I'm not sure I understood the margin trajectory, you expect the 29% is EBITDA margins. In this case, why the margin should be lower compared to the 35% to 40% registered in the last 3 years?

Okay. Thank you for your question. We do expect this as a revenue mix over the period. So nothing specifically different. For us, it's not -- absolutely not an issue, not a problem. We fully share the plan proposed by the management and also shared with investors. So we are fully aligned on that. And we track in the company as we are going to exercise -- with the fact we exercise our goal. And we think we are entering a very attractive business and also potential for synergies with the group.

Okay. I don't see any more questions on the table. So thank you very much for connecting. I'm available for any follow-ups, and I'll reach out to any of you analysts and obviously, all the shareholders that need any help in understanding the deal and the next steps. Thank you very much.

Thank you very much. See you. Bye.