Appen AGM: Mark Bryan and Richard Freudenstein questioned about failed $1.2bn Telus takeover

Appen chief executive Mark Brayan and chair Richard Freudenstein have faced a number of fiery questions at the company’s AGM, a day after a failed $1.2bn takeover bid.

Appen CEO Mark Brayan. Shares in the AI software firm surged on news of a takeover bid, but Telus International dropped the deal late on Thursday. Picture: Jane Dempster

Appen CEO Mark Brayan and chair Richard Freudenstein have faced a number of fiery questions at the company’s AGM, a day after Canadian IT firm Telus walked away from its mooted $1.2bn takeover bid.

“When are you the management team including directors going to resign? You have destroyed shareholders’ investment,” one shareholder asked Mr Freudenstein. Shares in Appen have dramatically fallen from a pandemic high of close to $40 to about $6.40.

“Thank you for that question. I think hopefully you’ve heard from Mark’s presentation and my presentation that the company has gone through a stage of renewal,” Mr Freudenstein said. “There’s been board renewal with two new directors appointed including myself, the other one being Stuart. There’s been significant renewal of the executive team. And I believe we have a very, very strong executive team who are really ready to really drive this company forward over the next few years.

“We believe we have a good strategy in place we have a good team to deliver it. And we look forward to working, working with our shareholders as we continue to do that.”

Activist shareholder Stephen Mayne asked ‘do you know who leaked the Canadian offer to Rear Window?,” to which Mr Freudenstein said “The short answer is no, but I believe it was Street Talk.”

NO DEAL

On Thursday Canadian IT services outfit Telus revealed why it decided to walk away from a $1.2bn unsolicited takeover bid of the Australian AI specialist, just nine hours after the potential deal became public.

The Sydney-based company creates human-curated datasets to train artificial intelligence programs. It has been hit by privacy changes made by Apple to its iPhones – changes that have also affected Facebook, which earlier this year reported a $US10bn ($14bn) impact on advertising revenues due to the changes.

Those changes restrict how much data third parties can glean from users when they use apps and browse the web. Appen has never disclosed its customer base, but it is thought to include the tech giants such as Amazon.

Appen and Telus had been in discussions about the takeover proposal for some weeks, sources say, but Telus suddenly pulled its bid without explanation after the market closed on Thursday.

“Telus International has a very strong track record of successful acquisitions of which we are very proud, and our strong balance sheet continues to provide us with significant optionality to pursue accretive M&A opportunities,” a spokeswoman told The Australian.

“We maintain a very healthy and robust M&A pipeline, and at any given point in time, our company is in various stages of due diligence with potential targets. We are a selective acquirer, and as such we engage in a robust evaluation of all target companies.

“In this particular case, we did look at Appen, and after an initial evaluation made the decision to walk away from our non-binding offer.”

Telus has numerous M&A deals in its pipeline, the spokeswoman said, and will continue to pursue potential future acquisitions to support its stated growth strategy.

BIG DAY

Appen shares surged after it disclosed the $9.50 per share non-binding offer – a 48 per cent premium to Wednesday’s closing price of $6.40. Shares rose 29.22 per cent to $8.27 on Thursday before the company entered a second trading halt.

The target told shareholders late in the afternoon: “Appen engaged with Telus in good faith through its advisers to better understand the conditions of the indicative proposal and to agree an appropriate confidentiality and standstill agreement, after which Appen was prepared to make available limited business and financial information.

“This afternoon, Telus informed us that they were revoking their indicative proposal. No reasons were given … no confidential information was provided.”

There had already been significant speculation in the market that Telus had pulled the bid. In sales commentary to clients before Appen’s late statement, Shaw & Partners’ James Nicolau said he believed Telus had walked because the “material market de-rate over the past six months, particularly in the technology sector, suggests the higher historical transaction multiple levels are not appropriate in the current environment”.

“The Appen board is seeking an improved offer and is due to grant Telus non-exclusive access to limited business and financial information subject to Telus signing a confidentiality and standstill agreement,” he wrote.

“Appen really have no leverage from this perspective, especially given the subsequent downgrade they released to the market this morning.”

Appen – one of Australia’s high-profile ‘‘WAAAX’’ tech stocks, along with Xero and WiseTech – has tapped Barrenjoey Capital to advise on the bid. Telus had engaged Rothschild.

BY THE NUMBERS

On Thursday the company also delivered a trading update, saying year-to-date revenue and orders in hand were $US297m, up 14 per cent on year.

Shares in Appen have dramatically fallen from a pandemic high of close to $40 to about $6.40, with a market value of $790m.

In February, the company set targets for the 2026 financial year of at least doubling earnings from 2020-21, improving customer mix with one-third revenue from non-global customers, and achieving a margin target of 20 per cent.

“We are highly focused on these targets and will invest for growth in new products, sales and marketing, partnerships and explore M&A opportunities with a focus on long-term revenue growth,” Mr Brayan said at the time.

“Our long-term revenue focus may impact EBITDA margins in the near term and future dividend payouts.”

But RBC Capital Markets analyst Garry Sherriff said Appen’s trading update implied that difficult operating conditions remained – and first-half earnings were expected to be materially lower than the prior corresponding period.

“The material market de-rate over the past six months, particularly in the technology sector, suggests the higher historical transaction multiple levels are not appropriate in the current environment.”

Meanwhile, Citi analyst Siraj Ahmed suggested there could be a potential bid from another IT services player.