March 25, 2021 - 5:13pm EST by
2021 2022
Price: 68.72 EPS 0 0
Shares Out. (in M): 39 P/E 0 0
Market Cap (in $M): 2,708 P/FCF 0 0
Net Debt (in $M): 1,463 EBIT 0 0
TEV (in $M): 4,171 TEV/EBIT 0 0

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  • Spin-Off



Although Constellation Software (“Constellation”) was written up recently on VIC by jon64 on 03/15/21, there was little-to-no attention drawn to the spin-off.  I wasn’t quite satisfied with the way the situation was portrayed and think the transaction is worth much more attention and consideration.  In this write up, I will be focusing my efforts into assessing’s business and explaining as best I can the mechanisms of the spin-off transaction and why I think it is worth an investor’s time.  

Situation / Set-Up Inc.’s (“”, the “Company”) stock has risen +8.6% since being spun-out from Constellation on February 1, 2021, outperforming both its former parent and the TSX Venture Composite Index.  However, sustained forced selling pressure from index managers and – to a lesser extent – disinterested legacy Constellation shareholders in conjunction with a pronounced lack of information / name-specific coverage on the Company has created an opportunity for investors to buy into a growing high-quality, well-capitalized, cash flow generative business at a discounted valuation.  



Using the complexity of this spin-off and the prevailing informational inefficiency to our advantage, I believe that an investment in’s sub voting shares presents a favourable risk / reward opportunity with excellent long-term upside driven by (1) turnover in’ shareholder base and indiscriminate selling pressures subsiding; (2) more primary information about the new Company’s business becoming available through quarterly earnings / filings and optionality on potential sell-side analyst coverage adoption; and (3) a re-rate of the Company’s shares and the elimination of its valuation discount as the Company independently pushes for continued organic growth – something that has slipped at Constellation.

This opportunity exists because of shareholder neglect typical in spinoff situations, the inherent difficulties in understanding the business and the lack of primary informational support therein ( operates in Europe, trades on the orphaned Venture exchange, and reports in €), and radio silence from the sell-side analyst community.  Of further note, Constellation is highly incentivized to deliver value to shareholders as it has (on a fully diluted basis) a ~30.4% stake in the Company, owns a majority-winning super voting share, and retains board-level oversight.

On a proforma FY21E basis and at its existing cap stack (pre-conversion), trades at 13.5x EV / EBITDA – representing a sizeable valuation discount to Constellation (20.4x) despite possessing a healthier organic growth profile and a more defensive customer base.  Assuming this valuation gap closes implies a +83% upside.



Business Overview’s spinoff combined Constellation’s central European subsidiary, Total Specific Solutions (“TSS”) and newly-acquired Topicus, an innovative software provider based in the Netherlands. In likeness to its former parent company, the new standalone entity acquires and manages vertical market software (“VMS”) businesses that provide mission-critical software solutions to a wide range of customers, many of which are in defensive sectors (government, public-sector healthcare, etc.).  The Company has three operating groups:

TSS Public

  • Focused on public sector / health care markets in Netherlands and southern parts of Central Europe

TSS Private

  • Diversified private sector markets in Netherlands, Germany, and the Nordics

Topicus (Old)

  • Finance, health care, local government, and education markets in the Netherlands’s portfolio of software is generally designed to automate as many aspects of their customers’ businesses as possible and are highly specialized.  Software solutions are primarily developed in-house; when not strategic or more cost-effective, the Company will license certain technology components from 3rd party providers. earns revenue, much like Constellation, through four segmented means:

Maintenance Fees

  • Customer support on’s software products post-delivery (72% of TSS FY20 sales)

Professional Fees

  • Implementation & integration services, customized programming, product training, and consulting (24% of TSS FY20 sales)

License Fees   

  • Fees charged for use of software products, typically struck at multiple-year or perpetual agreements (3% of TSS FY20 sales)

Hardware Sales

  • Re-sale of 3rd party hardware that forms part of solutions and / or customized hardware assembled internally (1% of TSS FY20 sales)

For context,’s new corporate entity structure is depicted below (from prospectus).



1)  Uncertainty, Selling Pressure, Strong Participation from Highly Incentivized Insiders’s sub-voting shares have been party to pronounced volatility, driven in large part by its small size relative to Constellation, institutional selling pressure from index fund managers, and a sizeable spread in consensus estimates as management has provided no forward guidance and no name-specific coverage from the sell-side community has been published at the time of writing.  I expect this hang-up to recede when the company releases its 1Q21 report and analysts begin initiating coverage on the stock.  In the meantime, it is important to note that 1) this uncertainty / informational inefficiency is still exploitable as evidenced by ~9.3% of index-managed float still outstanding, and 2) despite the uncertainties, what is certain is that Constellation’s management team is still participating / involved in’s directives and has very strong incentives to create value for TOI shareholders.

Regarding institutional selling pressure: in a 01/31/21 report BMO’s Portfolio Trading team estimated that ~13% of’s 39.4mn float was held by index funds (~5.12mn sh.), who would have complete discretion over selling timing (opposed to being forced to sell by a specific date).  Adding to this pressure was the fact that was spun-off on the Venture exchange.  So far, then, we have selling-inducing trading technicals driven by size and exchange considerations that have orphaned the stock.

It is obviously quite difficult to discern exactly how much of this portion of the float has turned over.  However, we can still arrive at a reasonable guess, thanks to holdings data from Bloomberg.   ~2.3mn shares have been sold by notable shareholders (Vanguard, MFS, MD Financial, CI, etc.) since’s IPO; of this figure, ~1.5mn shares represent managers that run index / passive mandates.  Based on my meatball math, this still leaves ~3.7mn shares, or ~9.3% of index-comprising float unaccounted for.

I imagine that this figure will likely be up for debate, and I can understand why.  I do concede that the vast majority of these filings for which my calculations relied upon were dated either as of the beginning or end of February.  Nonetheless, having a reasonably large enough presence of indiscriminate / forced sellers amid injected uncertainty provides investors with an opportunity for meaningful appreciation once the overhang associated with the current absence of actionable information on the new Company ends in the coming months.  

Moving on to what investors can ascertain.  Despite spinning the Company off, Constellation Software still retains significant involvement in the management of the new  There are several mechanisms through which Constellation achieves this.  

Firstly, Constellation has 6 board seats; two of these board members – as picked by Constellation – are independent, whereas the remaining four seats are held by current and former executives, including Mark Leonard.  For Constellation’s seats to be retained, a 15% minimum stake in the Company is required.  This clause is satisfied, as Constellation owns ~30.4% of (on a fully diluted basis) through their preferred shares investment.  In addition, Constellation owns a single super-voting share that gives them 50.1% voting rights.  This does not mean they’re busy in the weeds, though.  The day-to-day control of is run by legacy Topicus B.V. individuals.

Clearly, Constellation still wants in on the action over at  While in most other circumstances such a large controlling stake (with seemingly asymmetrical capital-at-risk economics) would be cause for alarm, it is worth noting that Constellation and are playing the same game here.  We can hence use our understanding of this set-up to our own advantage and align ourselves with Constellation insiders and a management team that have significant track records of value creation and successful capital allocation. 



2)  Strong Earnings & Free Cash Flow Growth Potential as a Combined, Standalone Entity

Piecing together the combined entity cap stack was, as demonstrated prior, an arduous task fit only for those willing to dig through’s long-winded filings.  Now, we are tasked with examining the economics of the business from the same lens, which proves even more difficult when you begin tacking on forward-looking operating assumptions.  

Having imperfect / incomplete information is tough to palette.  However, here is the way I think we should frame this: there is sufficient public information available to make reasonable estimates about what’s growth, margin, and cash free flow economics will probably look like on a combined go-forward basis.  The key word there is “sufficient”, as noted by my fantastic underlining job.  We do not have to be smarter than the rest of the street or possess perfectly correct assumptions.  We just have to be close enough.  

Our margin of safety here is baked into the fact that – even if performs a 1/3rd of how well Constellation has performed historically – the price an investor would be paying here is still very reasonable.  This portion of my analysis will be based on information disclosed in the Company’s IPO prospectus, Investor Rights & Governance Agreement (“IGRA”) (Topicus up to FY19), and TSS FY20 annual report.  Now with that out of the way, let’s get into the fun stuff.  

The two main sub-entities, TSS and Topicus, have very different growth and margin profiles.  Topicus, the smaller of the two, is highly entrepreneurial and driven primarily by its creative organic growth techniques.  Topicus currently only operates in the Netherlands and specializes in highly defensive sectors: finance, healthcare, local government, and education.  Whereas Topicus lacks the scale that TSS is party to, the entity’s edge comes from its lack of dependency on M&A to fuel growth.  

TSS, on the other hand, has a lower growth profile yet higher margins.  As disclosed in its FY20 annual report, FCF at TSS grew by +24% ~€130.1 million while margins sat at ~26% in FY20.  Organic growth, meanwhile, clocked in at +2% for the same period, which is exciting within the context of the pandemic and resultant slowdown in broad IT spending.  Total growth here is higher than that of Topicus but – as mentioned earlier – has historically relied on acquisitions.  Acquisitions made last year contributed +8.4% to growth, while prior year acquisitions added another +8.1%.  

Clearly, we have two similar businesses with dissimilar unit economics that can learn a ton from each other.  What I find particularly interesting is the fact that it was Topicus’ CEO who was appointed the top position at the newly formed  Daan Dijkhuizen has been at Topicus since 2013 and emphasizes a culture of “self-determination”.  The culture struck at Topicus is highly entrepreneurial, and I expect Constellation had that in mind when deciding on who should drive the ship.  A few other analysts have also taken note that the average tenure for employees is relatively high, at ~8 years.  

On a separate basis, both businesses possess compelling unit economics.  As a combined entity, I would be pressed if I did not express optimism.  Given TSS’ continued acquisition pace and Topicus’ growth from SaaS-focused products on virtual healthcare and education, I expect to comfortably generate over +€700mn in revenue in FY21, implying +20% compound growth rates.  For now, Topicus remains an incomplete picture; the subsidiary’s organic growth calculations will not be available until 1Q21 disclosures.


3)  New Cap Stack

Valuing a freshly spun-out company is typically an arduous task, often done with opaque information.  This is certainly the case with  Despite the fact that the Company has released its FY20 annual report, there aren’t public documents that clearly explain’s newly formed corporate entity structure (TSS and Topicus merger was completed after reporting date of 12/31/20).  Moreover, the proforma organizational structure is quite complex and requires a fair amount of manual effort to understand; the impact that the merger has had on the new Company’s enterprise value is unclear without all the right information.  Luckily, we can reasonably approximate what the new company’s cap stack looks like based on the Company’s long-form prospectus.

At the public co. ( level, as at the time of writing, there are 39.4mn sub-voting shares listed on the TSE as per the spin-off distribution.  Additionally, there are 39.4mn preferred shares (more on these below) and 1 super-voting share, both of which are owned in whole by Constellation.  Assessing the operating company structure (“Coop”) is where things get dicey.

At the operating (Coop) co. level, the Coop currently has 64.9mn ordinary units and 64.9mn preference units outstanding, of which owns 60.7%.  The remaining 39.3% is owned by Joday Group (TSS) and Ijssel (legacy Topicus); these units are all exchangeable and can be converted into sub-voting shares at any time.  These will likely be exercised and converted over time for liquidity purposes, as this is the only mechanism through which Joday Group and Ijssel can sell their stake.  There are plenty of reasons to retain ownership at the opco level, but for the sake of this analysis (and arriving at a fully diluted figure) I will assume a full conversion.

As mentioned above, there are currently 39.4mn preferred shares outstanding that pay a 5% coupon at par (€19.06/sh.).  The preferred shares are redeemable at par “if the volume weighted average share price is equal to at least the Canadian dollar equivalent of 125% of the Initial Pref Value, or the Canadian dollar equivalent of €23.83”.  However, there is also an option to instead convert these into sub-voting shares on a one-to-one basis.  Given today’s share price of +C$70/sh., it is more likely that Constellation converts these into sub-voting shares by the end of FY21.  This is corroborated further by the fact that 

Assuming then that 1) 51mn Coop exchangeable units are converted into sub-voting shares, and 2) 39.4mn preferred shares are converted into sub-voting shares, there are 129.8mn sub-voting shares outstanding on a fully diluted basis, which represents a 100% ownership scenario of’s operating company.



The Company currently has ~€103.2mn of in-place debt outstanding, comprising of 1) €19.5mn revolver, 2) €32.6mn term loan, and 3) €51.1mn lease obligations.  In addition, the Company indicated a ~€188.0mn revolving credit facility that would be put in place post-spinoff.  Assuming successful execution on obtaining this new debt, new would have ~€291.2mn in total debt, or ~C$433.4mn.

The new enterprise value of is therefore ~C$9.6bn, after the effects of adjustments related to a total preferred share conversion, a total exchange unit conversion, ~C$433.4mn in consolidated debt (new revolver + in-place revolver + term loan + lease obligations), and ~C$82.8mn in combined cash.


Valuation & Returns Profile

Since we do not have direct visibility into the Company’s consolidated financials yet, valuing its equity requires a little bit of finesse.  Assuming 1) €700mn in FY21 revenue (+20% total growth); 2) ~30% EBITDA margins (FY20A TSS ~32%); and 3) a 20x multiple (per the valuation gap closing between and Constellation), I would expect sub-voting shares to trade ~C$125.41.  This implies an upside scenario of ~+82.5%.

However, we should probably factor in the potentially dilutive effects of pref + exchangeable unit conversions in FY21.  The way I view this, there are three ways to factor this in: 1) deduct the value of preferred shares + exchangeable units from the equity valuation, 2) assume full conversion of preferred shares and exchangeable units to sub-voting shares, or 3) deduct the 5% coupon on the preferred shares from FCF, assuming no conversion.

For this exercise, I am going to deduct the value of the preferred shares from the equity value to back into a pro-forma consideration; I also think it is unlikely that Constellation would be willing to convert the entirety of its stake immediately.  When you deduct the par value of the prefs, you arrive at ~C$111.62/sh., representing a +62.4% upside scenario.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.



1Q21 quarterly filing releases, continued regular quarterly filings / press releases, sell-side analyst coverage adoption, shareholder turnover, potential long-term up-listing onto TSX


Inability to source reasonably priced acquisitions, continued selling overhang, significant dilution via conversion of Constellation / Joday / Ijssel preferred shares & exchangeable units

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