Our companies expert dissects the proposal to take over this AIM-listed ‘people business’ – and sees a possible buying opportunity if it fails.
In recent months I have been intrigued, if frustrated, by signs of turnaround at AIM-listed M&C Saatchi (LSE:SAA). In the last year or so, it has looked fully valued – typically on a forward PE of around 20x or higher – despite management cautioning about general uncertainty. After plunging from over 300p pre-Covid to around 30p in March 2020, the stock has advanced to test 200p.
M&C also has a history of accounting discrepancies plus an ongoing risk of dilution from options-based acquisition payments, and the financial summary table shows material losses since 2018.
But a new CEO – albeit a long-serving internal candidate – appointed a year ago is shaping a cleaner story, and recovery from the pandemic has been strong.
A 15 December update raised 2021 operating profit “materially” ahead of expectations, helped by new assignments and strong performance across the group. With a clear digital strategy bearing fruit, I would say M&C is honed about right.
AdvancedAdvtT’s intervention potentially raises risk/reward profile
After the market close on 4 January, it was intriguing that a string of big trades were reported traded at 200p, a 19% premium to the market price of 168p, which implied a determined bid approach in the offing. Fully listed AdvancedAdvT Ltd (LSE:ADVT) subsequently declared itself, with a near 10% stake.
This is a cash shell looking somewhat desperate to do a deal (supposedly it has just six months after raising capital), having placed 130 million shares at 130p in March 2021. Tilting at M&C looks odd given AdvT’s declared objective for acquisitions in the software sector; however, its 7 January game plan cited a share-based merger “to build a data, analytics and digitally focused creative marketing business…”
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AdvT intends to ramp up acquisitions with the promise of “similar valuation multiples” to other digital marketing groups that have been successful in using M&A. Acquisitions always come with risk, and this particular bid process is well advanced.
Yes, there are examples such as Martin Sorrell’s S4 Capital (LSE:SFOR), which trades on 30x earnings and is capitalised at over £3 billion. But at such size, the scope reduces for acquisitions to boost earnings per share. Moreover, every owner of a private digital tech or such marketing services company knows it is in demand and can name their price.
The stage is set for acquisitive PLCs to overpay, and for their equity ultimately to de-rate. S4 has already fallen 40% since last September, to 526p.
As the late Sir James Goldsmith used to say: “Once you spot a bandwagon, it’s too late.”
Risky tactics shown already by AdvT
AdvT bought its stake before making its proposal to the M&C board, a logical approach for a well-capitalised offeror with conviction about making an offer. But AdvT will have around £105 million left, while needing twice that to swallow M&C for cash – hence its “offer” of share-based merger.
But the terms – 1.86 new AdvT shares for each M&C share – dilute M&C holders with a disproportionate transfer of value to AdvT holders.
It is possible this was just an opening offer that was likely to improve, though arguably it lacked the substance to justify making it at all.
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Moreover, AdvT would be taking over board leadership and replacing the existing strategy with its riskier one; given that its backers include private equity, the hope would appear to be of leveraging acquisitions and selling the group in a few years.
But if such disruption results in director and senior management departures, it is easy for a “people business” like this to fragment as staffers join their bosses at new ventures and clients hold back from new contracts.
Vin Murria has boxed herself in
Murria owns over 13% of AdvT and chairs its board, as well as 13.25% of M&C, which was shrewdly acquired in late April 2020 when the stock was down in a 30p range. She then joined M&C’s board as a non-executive director in early March 2021.
It has therefore been possible to steer AdvT’s buying at 200p without personal financial risk, given her average effective buying price will be far lower.
But she will lose credibility with the institutional shareholders who backed a 100p placing in March 2021, if this ploy backfires. AdvT is currently suspended at 98p, having traded up to 125p last September on a premium to underlying cash value amid hopes for deals. After a first acquisition attempt resulted in nearly £2 million of aborted bid costs, £24 million has been spent on M&C shares.
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Potential tactics are unlikely to have been discussed with M&C shareholders – at least before this approach was declared – as institutions tend not to like being made insiders. Should this lurch at M&C fail, it is hard to see Murria remaining as a non-executive, supposedly “independent” director.
Behavioural economics would say she will therefore be forced into a more constructive approach. This is affirmed by AdvT’s announcement late last Friday, citing “a high regard for M&C’s business, management and board” and looking forward to discussing concerns announced earlier by an independent committee of M&C directors.
Yet AdvT’s declared strategy is making acquisitions; it has effectively proposed a reverse takeover. What would remain of M&C’s board would have to defer to a fundamentally higher-risk approach, whereas recent evidence shows its strategy working well.
M&C Saatchi - financial summary
Year end 31 Dec
|Turnover (£ million)||179||225||251||417||381||323|
|Operating margin (%)||8.2||3.0||2.1||-1.0||-0.8||-1.4|
|Operating profit (£m)||14.7||6.7||5.3||-4.0||-3.2||-4.4|
|Net profit (£m)||6.5||0.1||2.7||-13.1||-11.8||-9.9|
|Reported EPS (p)||9.1||0.2||3.2||-15.5||-13.1||-11.0|
|Normalised EPS (p)||10.0||0.5||6.2||-11.8||-7.2||-5.3|
|Return on total capital (%)||19.7||7.1||4.6||-3.5||-3.2||-4.7|
|Operating cashflow/share (p)||22.7||24.9||27.8||8.4||31.0||37.3|
|Capital expenditure/share (p)||3.4||5.2||4.5||6.7||6.4||4.1|
|Free cashflow/share (p)||19.3||19.7||23.3||1.7||24.6||33.2|
|Dividend per share (p)||7.2||8.3||9.5||11.0||2.5||0.0|
|Covered by earnings (x)||1.3||0.0||0.3||-1.4||-5.3|
|Net debt (£m)||-5.5||-0.3||-7.5||2.5||38.2||13.4|
|Net assets (£m)||37.7||42.6||57.5||68.0||49.2||44.9|
Potential buying opportunity if AdvT’s approach fails
I would discount speculation that M&C is now in play and another bidder will appear. AdvT has so far made a quite reckless move, so it is entirely possible M&C shareholders do not concede. They ought to be aware of the risks to a ‘people business’: intrinsically from a change in leadership, but also in joining an acquisitions bandwagon.
In that scenario, M&C’s price would slump in order for the AdvT’s 10% stake – and possibly Murria’s 13% stake – to be placed with institutions. The timeframe before such a deal was done would constitute a useful buying opportunity.
I think M&C shareholders should continue to hold, given this business has the strength to overcome a red herring episode. Be aware, however, that if AdvT were to succeed and M&C became fully listed, AIM inheritance tax benefits would be lost. M&C is actually a good share to consider for this purpose if it remains independent, as it offers lower risk than most AIM shares.
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Buying initially now at 186p does not appear an intelligent speculation, given the situation is messy. AdvT would need to improve its share exchange terms to at least 200p (as implied by takeover rules), given this was the last price it paid for stock. A 20% premium to 170p - the price before the approach - implies 204p, although M&C traded up to 400p during 2015 to 201
The timing of Murria’s dealings is therefore astute: it looks broadly correct to “average up” on the back of strong trading statements, which augers well for momentum.
But it seems an ill-thought-out tactic to present such a deal that has no current attraction to M&C shareholders; and a tricky task for these two boards to agree strategy and terms. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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