DMX rejects Count’s Diverger acquisition, citing undervaluation concerns

In a letter issued to shareholders, DMX’s management has expressed concerns about the undervaluation of Diverger and cited a “significant” disconnect between the proposed transaction’s terms and Diverger’s intrinsic value.

Last month, Count Limited announced it had entered into a binding scheme implementation agreement to acquire the entirety of Diverger’s shares, amounting to 100 per cent, at a price of $45.3 million.

Moments later, Diverger’s major shareholder, HUB24, issued a statement of support for the transaction, noting it will vote in favour of the scheme in the absence of a superior proposal.

However, DMX – a holder of a 5.2 per cent stake in Diverger – believes that Count’s offer “substantially” undervalues the firm.

“While it is encouraging to see interest in companies that we own, these bids are at levels well below our assessments of intrinsic value,” said DMX, alluding to two other bids it has received for companies it partly owns.

Despite spruiking its value, DMX admitted that despite Diverger’s impressive growth over the years and strong management execution, its share price has underperformed, remaining at levels similar to those in 2017 when DMX first picked up a stake in the firm. But the asset manager also expressed its firm belief that the acquisition’s proposed premium doesn’t adequately reflect the company’s intrinsic value.

“Diverger is a business with an attractive growth profile and strong and capable management execution. With 90 per cent of its income recurring through ownership of some attractive assets such as its industry-leading accounting training business and its high margin investment management business CARE, Diverger has attractive qualitative aspects,” DMX said.

“Given the disconnect between value and share price, we consider any reference to the historical Diverger share price in the context of determining fair value is effectively redundant,” it stressed.

DMX also pointed out that when looking at publicly disclosed FY25 earnings targets, the combined Count/Diverger business is expected to be more expensive (5x EBITA) than Diverger on a standalone basis (3.6x – 4.3x EBITA), even after accounting for the benefit of $3 million in projected synergies that will cost $8 million to achieve.

“While there are other benefits to the acquisition (improved liquidity, larger, more diversified company), we struggle to see the value basis of this transaction from the perspective of Diverger shareholders.”

Ultimately, DMX concluded that it does not believe this transaction reflects “the fair value” of the Diverger.

“As market sentiment towards small companies improves and as Diverger’s strong growth trajectory returns, then this earnings growth should eventually drive a much stronger share price without Diverger shareholders being exposed to any of the significant acquisition integration risks and costs.

“We have provided this feedback to Diverger and have advised the company that we do not intend to support the proposed scheme as it currently stands.”

At the time Count first announced its intention to acquire Diverger, it had 379 financial advisers, while Diverger would bring an additional 200 into the fold. This substantial growth in scale within its wealth division, Count said, played a pivotal role in the firm’s decision to pursue the acquisition.