His comments last week fueled a market rumor that vulture private equity firms or a big legal tech player might be sniffing around.
But rumor and reality are two different fish pots. An operator willing to bid on Nuix, lock, stock and barrel could well be wishful thinking. Nuix, as it stands, is not an attractive proposition with declining revenues, runaway cash flow, and massive legal and regulatory baggage weighing down the company.
In light of the many issues facing Nuix, a more likely scenario is that a strategic player enters the fray and goes for assets, particularly the Nuix Engine, which generates roughly 80 percent of total revenue. This would allow the acquirer of the assets to ditch the Nuix brand, save intellectual property and customer relationships, and avoid the litany of problems and liabilities that plague the company.
Whether Nuix and its shareholders accept this is the big question. Macquarie still owns 30 percent of Nuix and thus plays a key role in deciding his fate.
The reality is that an asset sale would put shareholders in the unenviable position of having to vote on a deal that could potentially bring them little or nothing.
Meanwhile, the problems facing Nuix are significant. They include a legal battle with his former CEO, Eddie Sheehy, over a $183 million option claim. The case concluded last week with final submissions heard. Next is the trial.
A 519-page affidavit filed in Federal Court by Sheehy turned out to be fascinating reading. He describes a culture in which some staff reportedly had “extraordinary” spending during a period of savage budget cuts.
There were also allegations of an affair between then CEO Rod Vawdrey and his head of human resources, making it difficult to complain about the CEO.
The affidavit also referred to a $100 million financing package with a superfund that was “eliminated” in mid-2016, when Nuix founder Tony Castagna believed he was about to be indicted for tax evasion. and money laundering. “I don’t want to tell UniSuper. Instead, I’m going to kill the deal,” he allegedly told Sheehy.
After the deal was closed, Castagna negotiated a deal with Macquarie that resulted in Macquarie getting a controlling interest. Sheehy’s days were numbered, with accusations that he was bullied by the company.
Other issues facing Nuix include the long-awaited outcome of an investigation by the corporate watchdog into whether Nuix breached its ongoing disclosure obligations. If the Australian Securities and Investments Commission rules against Nuix, it could be fined and embolden class action law firms that have gone to court, alleging breaches of continuous disclosure obligations, among other things.
The story of the Macquarie-backed Nuix has been one of woe ever since it was listed at an issue price of $5.31. In the initial public offering, Macquarie sold part of his shareholding and raised more than $565 million, which contributed to bonuses for some Macquarie executives in 2021.
Within weeks of trading in December 2020, Nuix’s stock price hit a high of $11.86, putting it at a valuation of over $3.7 billion, as investors enjoyed a prospect of 330 pages that featured the forensic software company as a growth stock.
By February 2021, the share price had plunged 32 percent after posting an interim result that surprised investors.
Haunted by the unfolding scandals
Since then, Nuix has been beset by failed forecasts and scandals, including insider trading allegations against former CFO Stephen Doyle.
Doyle is understood to refute the allegations.
According to a well-placed Nuix expert: “Nuix will almost certainly need an injection of cash in the next 12 months. You are spending money on management overhead, legal fees, and your strategy. Its cost base is that of a multibillion-dollar market cap company, not the $200 million minnow it has become.”
In its preliminary accounts for 2022, it includes a note as a going concern, which is worth reading.
“The potential outcomes of the litigation are important to the assumptions used regarding the return of operating net cash inflows in the full year 2024…and access to other sources of financing should they be necessary to achieve the group’s strategy. ”, says the note.
“Uncertainties associated with funding sources, unknown litigation outcomes coupled with potential business impacts of ongoing litigation, led the group to conclude that while there are uncertainties related to events or conditions that may, if If any material adverse outcome casts doubt on the entity’s ability to realize its assets and settle its liabilities in the normal course of business at some point in the future, it remains appropriate that the interim final financial statements be prepared on the basis of a running business.
The story also touched on the day of the trial in the $183 million lawsuit against Sheehy. “You may request a stay of judgment pending the outcome of any appeal which, if granted, would delay any obligation to pay any liability arising from a judgment until an appeal is determined, which is likely to be at least 12 months after the date of the sentence. signature of this financial report.
As the Nuix train wreck progresses, Rubinsztein’s serial optimism has only increased. After reporting a loss for the year, he wrote in a letter to staff: “We have a great and exciting fiscal year 23 ahead of us, and I am incredibly energized by the results we are already seeing from our efforts to execute excellently and give back to Nuix to strong growth”.
His optimism was turned deaf on Saturday when he took to LinkedIn and discussed Qantas and its frequent flyer program. “The one asset that has depreciated more than any other in my personal portfolio is the value of my frequent flyer points,” he lamented.
“Three years ago, points were worth possibly 3-6 times what they are worth today (my guess is based on the number of points it cost to book a classic international ticket combined with the unavailability of these tickets).
“I recognize that airlines have had an incredibly difficult time during COVID, and it was a super difficult leadership challenge… However, I still have these questions: are the schemes being regulated? What obligations does Qantas have to maintain the value in these points?
Shareholders who bought the Nuix float at $5.31, or worse, bought at $11.86, compared to today’s 72 cents a share, have a lot more to complain about.