Takeover Tales (Part 2)
Takeover Tales…Q3 developments
Merger activity post “Brexit” has been significant with large/ mid cap <£2bn cap:-
ARM Holdings (ARM) – agreed deal with SoftBank for £17 per share the buyout took place at a 43% premium to the undisturbed share price. ARM received the largest acquisition premium in the UK IT sector since Hewlett Packard bought Autonomy in 2011. The deal appeared motivated by the fact that Masayoshi Son, SoftBank founder and CEO held ARM in “high regard” as opposed to any immediate industrial logic of the combination.
Of equal note was the buyout financing. Mizuho Bank lined up a $9.4bn bridging loan for SoftBank. The global banks are providing billions in highly competitive leveraged loan financing capacity for M&A opportunities.
MicroFocus (MCRO) – the agreed merger with Hewlett Packard Enterprise Software unites MicroFocus with the former Autonomy (acquired by HP in 2011). The merger is structured almost as a merger of equals with HPE shareholders owning 50.1% of the enlarged group alongside two pre-merger cash distributions worth $2.9bn. The deal is a good example of a transatlantic deal that aims for global reach in key software technologies.
Premier Farnell (PFL) – Avnet stepped in with an offer of 185p cash per share trumping an earlier offer of 165p from Datwyler by 12%. The takeover is a substantial premium to the 100p-110p level at the start of 2016.
SAB Miller (SAB) – the offer was raised from £44 per share cash to £45 due to the drop in sterling making SAB a cheaper acquisition for US based AB InBev. The deal should close on time on 10th October 2016.
William Hill (WMH) – although the Rank/ 888 Holdings consortium failed in its attempt to even get the William Hill board to the negotiating table, the move was expected to attract alternative offers. Those unfortunately did not materialise leaving William Hill to conclude, rightly in our view, that both consortium parties (each of which are about 1/3rd of the size of Hill) would be unable to offer the sort of premium required. Furthermore the structure of the offer would leave the enlarged group highly leveraged post deal a problem in the highly regulated gaming industry. We were pleased William Hill kicked the Rank/888 offer into touch, we would prefer a combination with Paddy Power.
Common themes
We see several common “threads” with the large M&A to date:-
- There is a window for US buyers with sterling not far from 31 year lows v USD and considerably cheaper v EUR.
- Valuations appear conducive to M&A – Brexit caused UK stocks to de-rate.
- Cheap financing availability due to the global zero/ negative interest rate environment encouraging banks to increase their leveraged lending capacity.
- Ahead of Article 50 the new Cabinet are keen to stress the UK remains open for business and could adopt a “hands off approach”. We note Chancellor Hammond’s evangelical response for the SoftBank/ ARM deal.
- UK economy appears resilient post vote (strong unemployment / PMI data).
Carpetright – LSE Small Cap – BUY
Carpetright is a leading specialist floor coverings and bed retailer. Founded in 1988 the business operates in the UK, Netherlands, Belgium and Eire primarily via a store network comprising 435 UK outlets and 137 in its EU territories. The board are in the midst of a UK store refurbishment plan covering 100 of its UK stores costing £10m over 2016/17 to counter competitive pressures from Tapi, a new concept store with 51 UK outlets. Carpetright axed its dividend in 2012 to fund a store rollout programme but this year, the board reversed course and closed 43 underperforming stores. The board has cut debt to sub £1m making Carpetright an easier acquisition for a competitor. In our view this is a possibility given the recent Brexit sell off has seen renewed concerns over the impact of the sterling devaluation on the home furnishings sector. Investors are arguably overlooking the potential for further consolidation.
| Company | Carpetright |
| Share Price | 237 |
| Target Price | 350 |
| 52 Wk Hi/Low | 550/212 |
| Shares O/S | 67.92m |
| Market Capitalisation | £160.9m |
| Avg Daily Volume | 76k |
| Dividend Yield | 0% |
Source; Fidessa plc
Key Catalysts
- New store format and various online and credit initiatives (recent introduction of interest free credit) are likely to impact sales volume growth in FY17.
- Underlying improvement in operating profit margins to continue; net margins moved up 0.7% to 4.3% in FY16.
- Valuation at £161m is just 0.35x annual sales and 8.3x EV/ EBITDA.
- Clear target for large/ mid-sized EU retailer
Key Risks to Price Target
- Carpetright is sensitive to the UK property market, lower completions mean lower refurbs.
- Recently launched concept store Tapi is a competitive threat to Carpetright in the UK market.
- Tough sector with frequent company failures, including Land of Leather and SCS Upholstery
- Inherent exchange rate risks, significant costs exposure in Euro/ US dollar.
Vertu Motors – LSE AIM – BUY
Vertu is the UK’s 6th largest autodealer formed in late 2006 to acquire and consolidate within the motor dealership sector. In 2007 Vertu acquired Bristol Street Motors (the 13th largest UK dealer). Vertu has since grown via a multi franchise model from 105 of its 127 dealerships with most major marques- the recent outlet growth rate is c. 10% pa. Vertu also offers considerable aftersales activities comprising servicing, parts and accident repair centres. Further consolidation amongst UK autodealers is possible given Vertu’s smaller market share relative to larger players such as Pendragon, Sytner, Lookers, Inchcape and Arnold Clark. The recent drop in market capitalisation to just £197m throws up value pointers (Vertu Motors valuation is c. 8% sales and below net assets per share of 58p).
| Company | Vertu Motors |
| Share Price | 49.75 |
| Target Price | 60 |
| 52 Wk Hi/Low | 78.5/37.75 |
| Shares O/S | 397.27m |
| Market Capitalisation | £197.6m |
| Avg Daily Volume | 625k |
| Dividend Yield | 2.6% |
Source; Fidessa plc
Key Catalysts
- Vertu Motors property portfolio worth £138.2m and low net debt – both are considerable incentives to a trade partner in an acquisition scenario.
- Recent £35m placing at 62.5p per share has provided Vertu with strong working capital for funding growth opportunities.
- Diverse institutional shareholders are likely to make an acquisition easier.
- Valuation appears inexpensive at a time of increased M&A by sector peers.
Key Risks to Price Target
- Weaker sterling impacts cost of new car purchases from EU manufacturers increasing costs.
- Demand for new cars is sensitive to UK GDP growth.
- Recent Vertu acquisitions have yet to meet margin objectives. An acquisition led strategy runs the risk of overpaying and not meeting synergy targets.
- Vertu’s growth plans absorb operating cash flow limiting room for dividend increases.
Conclusion
When considering our M&A “school of thought” bear in mind:-
- Timing factors are important – M&A is often “out of the blue”. I can cite companies that were takeover targets for years before they were actually acquired! So timing is unquantifiable.
- It might be better to consider takeovers after they have been announced where the targets’ shares are at a discount to the offer.
- A company considered an acquisition targets normally attract “bid premiums” the shares trade at higher valuations relative to their peer group for this reason.
- A board of directors cannot be compelled to agree to recommend an offer to shareholders. There may be strong reasons why the timing of the takeover is negative for the board.
- A takeover does not guarantee the payment of a takeover premium.