Linewize Acquired by Family Zone (ASX:FZO)

Cross post from Punakaiki Fund

We are delighted to announce the sale of Linewize to Family Zone Limited (FZO.AX). Family Zone have released a comprehensive announcement to the ASX.

Why the combination works
There was almost immediate agreement, at the start of negotiations, that the combination of Linewize and Family Zone was good for both businesses. Linewize provides world-leading technology for firewall, filtering and classroom internet management tools, and has 260 New Zealand schools on board. Family Zone has a disruptive business model (selling on-device filtering software to parents via school mandates) and is growing very quickly in Australia, and can rapidly expand the use of Linewize’s technology. They have also signed deals with large telecommunications providers. The combination is a strong sales and marketing engine on top of some excellent technology, and better geographic coverage for all.

Linewize founders Scott Noakes and Michael Lawson were very keen to join Family Zone, and we collaboratively worked with them and Family Zone to arrive at a negotiated agreement that is good for all parties.

Family Zone will acquire 100% of the Linewize shares in return for up to 19 million shares in Family Zone, along with a small deposit of $200,000. Half of the Family Zone shares are “Performance Shares” and are only released, in five tranches, when certain performance hurdles are met. See the Family Zone announcement for more on this.

There is a short due diligence period now, after which the deal becomes unconditional. The issue of Family Zone shares as compensation will need shareholder approval at a Family Zone shareholder meeting, likely to be in late November. If the Family Zone shareholders do not approve the issue of Family Zone shares then the consideration price will be paid in a fixed amount of cash.

Founders Scott and Michael put in place a generous ESOP plan before Punakaiki Fund invested, and so the current and recent employees will share 16% of the consideration, as well as staying on with the business. Scott and Michael each receive 32% of the consideration. We are delighted with the result for Scott, Michael and the team, and commend them on their efforts and on this deal. Scott and Michael will stay with the business as executives, and will each be issued 1,000,000 Family Zone Executive Performance shares in addition to their base compensation and their consideration from this sale.

Punakaiki Fund Result
Punakaiki Fund holds 20% of Linewize, after an original investment of $1 million, spaced between June and December 2016.

If the Family Zone shareholders do not approve the issue of shares then Punakaiki Fund will receive AU$1.33 million (~NZ$1.5 million) in consideration shares, and the performance share compensation will be issued as cash using the share price at the time. We see that shareholder approval is highly likely.

Family Zone is a small company with a share price that has appreciated very quickly since their IPO a year ago. To provide against any risk of the share price falling between now and the Family Zone shareholder meeting, if volume weighted average price (VWAP) of the Family Zone shares is under AU$0.70 for the five days before the meeting then Punakaiki Fund’s number of shares will be increased to compensate. The share price closed last Friday at AU$0.855.

Punakaiki Fund will receive 1.9 million Shares and 1.9 million Performance Shares in Family Zone, as well as $40,000 from the deposit. We will use some or all of the deposit to contribute to deal costs and ensure the working capital is acceptable at the time of the transaction. At Friday’s closing share price of $0.855 per share this has a face value of AUD$3.29 million, or NZ$3.69 million. However the consideration is in listed shares, and half of them are locked up until (or if)  performance targets are met, so the value could go up or down.

Extracting Value for Punakaiki Fund

Punakaiki Fund will be able to sell the initial 1.9 million shares as soon as they are received after the Family Zone shareholder meeting. However at this stage we do not know what our strategy will be, and we are conscious that we will have a relatively large holding and will exercise caution whatever our decision.

Wholesale Round

It’s older news, and was covered at the Punakaiki Fund AGM, but we realised that we had not released the official results for the July 2017 Wholesale Offer. We closed this offer in early September, after being extended twice by the Board. The Board firstly elected to extend the offer until the end of August, and then another few days to allow the finally paperwork and funds to be received.

We deliberately kept a low profile for this offer, with very limited engagement with prospective investors. We were delighted with the result of $1.8 million raised from 11 investors, and welcoming 9 new investors.

Investor Statistics
We now have a total of 625 investors, with an average holding of just under $44,850, at $20 per share. That’s more than several listed companies, including Family Zone.

As a sign of our success with larger investors, we now have 80 investors with holdings, again at $20 per share, of $100,000 or more, and 130 with $50,000 or more.

About Lance Wiggs

@lancewiggs
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