Share trading before Xero capital raise "reeks" - Forbar

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Share trading ahead of this morning's announcement of a $147.2 million capital-raising by Xero [NZX: XRO], which caused an unexplained jump in its share price "reeks to high heaven," says David Price, the head of institutional broking for Forsyth Barr.

Xero chief executive Rod Drury insists he is "pretty confident" last week's share price movement, which prompted a 'please explain' notice from market regulator NZX, is not related to today's announcement that US-based institutional shareholders have invested $147.2 million of extra capital into the cloud accounting software firm.

Shares of Xero jumped 26 percent so far today, rising $4.75 to $23.00, the highest it's been since September, after the Wellington-based company announced Silicon Valley venture capital firm, Accel Partners, had invested $132.9 million at $20 per share for about a 4.9 percent stake. Matrix Capital Management, Xero's largest institutional investor, topped up its own investment with an additional $14.3 million. The investment doubles the company's cash balance to $285 million, from around $140 million beforehand.

Price said the placement at a premium was "a very positive endorsement" for Xero, and that it was good to see it increasing cash reserves as the company grows and builds up its staff. Still, he said there were some question marks raised about trading ahead of today's announcement. 

"That kind of smells like three week old fish, that deal," Price told BusinessDesk. "They got the 'please explain' a couple of days ago and said they didn't know why the price was up, and then they go and do this deal. It reeks to high heaven."

Last Thursday, NZX issued a 'please explain' notice asking Xero to confirm it was disclosing all material information after the share price rose some 16 percent in two days. The tech firm confirmed it was, without issuing any further explanation to the gain in its shares.

Under continuous disclosure rules, listed companies must inform the market of any material information which could affect the share price. Under the NZX listing rules companies have a safe harbour if they're considering capital raising but are yet to finalise the deal, managing director of Salt Funds Management, Matthew Goodson said.

Xero "themselves legally are fine, however it would be fascinating to know all those people who bought the stock when it had the jump from $16 to $20, what they knew and when," Goodson said. "Clearly there's a whiff associated with this, given the legalistic interpretation of the listing rules that doesn't attach to Xero, but it does attach to whoever was buying that stock."

The stock market operator said it would continue to monitor Xero's trading history, but confirmed continuous disclosure obligations did carry exceptions, "in particular, a disclosure obligation may not be immediately triggered if information relates to an incomplete proposal or negotiation, and that information is confidential and that confidentiality has been maintained," a spokeswoman for NZX said in an email to BusinessDesk.

Xero chief executive Rod Drury told BusinessDesk last week's gain in the share price was unrelated to today's announcement.

"We're pretty confident it's not (related). We kept it super tight and we keep a good close eye on the register, so we're very careful about that," Drury said. "What we did know was that some people speculated that we did have a large seller exit the market, and off the back of an awesome Xerocon event and lots of media we did see it go up, but then it came down again yesterday."

The stock came under selling pressure last year, with its share price dropping from a high of $45.99 in March to as low as $15, as investors mulled the outlook for growth, particularly in the US. The stock surged in October 2013, after it raised $180 million in capital to target growth in the US market. The escrow period for those investors ended last October, which caused further selling in the stock.

"If you go and have a look at the price behaviour and go and find another period when it's done that, it's been a very long, long time since they've done that," Price said. "You would sought of suspect that would be the sort of trade that the NZX would definitely have at the top of their list."

The software developer wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimated 29 million small-to-medium sized business owners. The extra cash may be used for a possible US initial public offer, as well as further acquisitions of smaller software as a service businesses, Drury said.

"We didn't need to go and raise money, we had enough money for our plans, but we were able to price it at a premium," Drury said. "It should just give investors, partners and customers a huge amount of confidence."

Last year the company said its execution in the North American market hasn't matched expectations and it is making key leadership changes after its North American chief executive Peter Karpas left the business in September just six months after joining.

Today the company also announced former Dell executive Russell Fujioka will replace Karpas, while Graham Smith will join the Xero board as an independent, non-executive director.

(BusinessDesk)

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