The truth behind CloudCentral's failed ASX float

Australian cloud platform provider CloudCentral failed in its attempt at an ASX listing in July – and now its would-be reverse listing target has revealed what went wrong.

The annual report of Dromana Estate, a wine company that had been pursuing a deal for CloudCentral to take over its listed shell, has revealed previously undisclosed details about the botched deal.

The wine company's board said they were "extremely disappointed" at not securing the CloudCentral deal or another mooted buyout of a mining project in Africa.

Dromana is still hoping to get back $163,223 it loaned to CloudCentral during the negotiations, though it has written off the debt, along with another $97,524 in acquisition costs.

A key pillar of the CloudCentral deal was the involvement of Andrew Milner, an experienced company director whose CV includes stints at iiNet and L7 Solutions, as well as another executive to be put forward by finance broker Hartleys Limited, which had been tasked with helping raise $3.5 million of capital.

However, Milner and this other executive "withdrew their acceptance to join CloudCentral", leading to the collapse of the merger between Dromana and the infrastructure-as-a-service provider.

"As a result of this condition precedent being breached, Hartleys withdrew their Leader Manager Mandate and Dromana was unable to complete its acquisition of CloudCentral," according to the annual report.

Andrew Milner has shed light on the two reasons he pulled out – a move that ultimately derailed the merger. He blamed competition from global players Microsoft Azure, Amazon Web Services and Google, as well as the impost of ASX compliance for a small Aussie company.

"I pulled out of the [Dromana]-CloudCentral deal as a result of my due diligence inquiries. I felt that the CloudCentral business wasn't ready to be ASX listed."

Milner, who would have joined as a non-executive director and seeded the management team with some of his own people, told CRN: "Ultimately, though, we couldn't make the numbers work; as a pure IaaS play, CloudCentral will find it extremely tough to compete with AWS, Google, Azure etc. Secondly, the ongoing governance and compliance costs of being ASX listed were simply too high for a business of CloudCentral's size."

Microsoft, Amazon and Google have been waging a price war that has seen the market rate for infrastructure-as-a-service fall dramatically. Just last week, Google revealed a 10 percent reduction across its entire Compute Engine platform.

CloudCentral founder Kristoffer Sheather has also spoken to CRN for the first time since news broke of the scuttled float. He agreed with Milner that the compliance costs were hefty.

"The ASX compliance costs are high, as we all recognise, but we were planning on doing a few acquisitions to help spread those compliance costs across a larger base. But even that said, they are very high."

Sheather estimated the costs would be $300,000 to $500,000 a year for things such as financial auditing, a board, accounting, a CFO and the ASX listing fees.

But Sheather argued that CloudCentral offered strong differentiation from the public cloud behemoths.

He said the discounting war between Azure, AWS and Google was "a challenge for everybody, not just us".

"That being said, we are providing a very different proposition to Amazon, Google and Azure. The majority of our services are managed cloud services; none of those guys provide managed cloud services, so it is quite a different product that we offer to customers.

"It is cloud server management and monitoring of the overall whole [infrastructure] on behalf of the customer, and those components of the overall mix are not subject to the same price pressures. The majority of our business is managed cloud services.

"The other thing I'd say is we have deployed four points of presence in Australia. I think Amazon have Sydney only. We can and do offer our customers two points in Canberra, one in Melbourne and one in Sydney, putting the workload closer to the customer and giving them more choice," he added.

Float frenzy

There has been a rash of public floats in the Australian tech sector in recent months, many of them backdoor listings, and Milner also offered his take on the state of the market.

"There are so many listed shells out there desperate to do deals, there's a tendency to conduct only a cursory level of [due diligence] on potential acquisitions without asking the really hard questions.

"It's often difficult for the corporate guys to properly assess the true value of these businesses without practical industry experience and an intimate understanding of the technology and the relevant market. Plus of course there's a strong bias towards wanting to get a deal done in the first place.

"I spend quite a bit of my time doing assessments of tech deals for brokers and corporate guys. Every now and then you unearth a gem with real potential, but the vast majority just aren't mature enough to be listed," added Milner.

It is unclear whether a different public float is in CloudCentral's future. Sheather said the team "will consider other options as well", adding that since the plan fell apart, the business has continued to grow revenues.

Preparing for a float is an arduous and distracting process, he added. "It takes a lot of time. It will take six months of focus out of business while you are working on that, rather than working on the business itself.

"It take a lot of commitment and work, especially if you are a smaller company. It is obviously easier for a bigger company to do it."

CloudCentral is not the only cloud player to fail in its public listing ambitions. Melbourne-based PRM Cloud Solutions was set for a sale to publicly listed Minerals Corporation, but the deal was terminated in July.