Interactive Investor

Stockwatch: three takeover situations analysed

22nd March 2022 11:12

Edmond Jackson from interactive investor

What have this logistics firm, a technology company and upmarket fashion business got in common? Our companies analyst explains and gives his view on prospects for each.

In recent months, takeover interest has spread in the small- to mid-cap arena, from where many de-rated last September. Bid approaches I have covered include airport and cargo logistics group John Menzies (LSE:MNZS) and technology group Oxford Instruments (LSE:OXIG). Now, the upmarket fashion group Ted Baker (LSE:TED) is subject to a potential cash offer from a US private equity group. 

In the wake of Covid, the UK market offers some modest valuations in global context; also, a low-growth environment encourages takeovers as a means to financial progress. 

It also reflects a long held understanding that the UK offers one of the most open markets for corporate control, with a steady stream of businesses sold to foreign buyers. 

Yet war in Ukraine is introducing some hesitancy, and who knows if commerce may become compromised again as Covid cases rise? Further supply disruption from China seems likely. 

Where is the offer for John Menzies? 

Last November, I drew attention to Menzies at 295p on recovery and takeover potential, arguing that the business is at an inflection point. In January, a Middle Eastern operator that is expanding globally made an approach at 450p a share, which increased to 510p. By 21 February, 608p was agreed by the Menzies board – pending due diligence and regulatory approvals. 

While the latter can understandably take time, an 8 March announcement said discussions between the companies were ongoing, and that the Put Up or Shut Up deadline had been extended from 9 March to 30 March. 

The stock initially dropped to a 20% discount below the potential offer price, as if the market feared the Ukraine crisis was triggering a rethink, or possibly that any banks helping finance a £560 million deal might be turning cautious. 

It has recovered to a 10% discount near 550p where, if forecasts are fair, the exit price/earnings (PE) ratio would only be 10x.  

Overall, I incline to a holdstance, but according to risk preference holders might want to consider locking in some gains. The 11% upside to the potential bid price compares with 45% downside to where the stock traded pre-bid.  

If no offer materialises, the price could drop even further in the short term, but I think would then rebound. This approach has highlighted value in Menzies unless global travel becomes pressured. Hold. 

Spectris abandons Oxford Instruments takeover   

On 28 February, Oxford Instruments announced that following discussions its board was minded to recommend a possible £31 equivalent offer from Spectris (LSE:SXS), in a mix of cash and shares. Although an unsolicited approach, the combination looked to have sound strategic rationale, so on 1 March I drew attention to Oxford as a speculative ‘buy’ at £26.25

While cautioning about 20% to 25% downside if Spectris walked, versus 15% near-term upside if a deal went through, it seemed the positive tenor of discussions implied a deal was likely, and if called off then Oxfords improving revenues should limit downside. 

Force majeure has prevailed: on 7 March it was announced that despite a compelling strategic and financial rationale” no offer would be made because war in Ukraine has created significant uncertainty in global conditions”.  

At least one board thus sees it as unwise to raise corporate risk at this time by undertaking a takeover. 

Oxford initially plunged 23% to 1,760p but has recovered to 2,150p – a 16% drop on my speculative buying idea. That it represents a near 10% premium to Oxfords pre-bid price likely reflects potential for Spectris to return in future. Hold. 

An offer for Ted Baker at 170p to 200p a share?  

Nearly a month ago, I considered whether this ‘global lifestyle’ retailer faces a new dawn after a 35% jump in like-for-like sales in its key fourth quarter to 29 January. Management cited accelerating growth with significant improvement in the full price mix”. 

A medium-term view of prospects is tricky, given Ted Baker is exposed to consumer discretionary spending and economists now speak of stagflation at best, or even a recession. Yet luxury goods have proven resilient even to recessions, and the current CEO looks to be laying foundations for a turnaround. At 96p, I thought the stock rated ‘buy’ citing the medium-term possibility of a takeover. 

Last Thursdays rising stock price flushed out a Friday announcement by Sycamore Partners, a US private equity investor specialising in retail, confirming it is in the early stages of considering a cash offer. 

It looks serious considering Sycamore has hired an adviser, Numis Securities. Up to say 200p a share would cost £370 million in the context of Sycamore owning a £7.6 billion equivalent investment portfolio. Such a potential buyer should have no problem with funding. 

Now is therefore a good time to act before the stock starts to price in recovery, unless fears grow of a wider downturn. In recent weeks it has bumped along in an all-time low range of 85p to 100p, yet it traded over 200p last May.  

A net £90 million equity-raising at 75p in May 2020 meant 217% dilution and introduced investors potentially amenable to the idea of ‘cash today’ rather than holding for recovery (and the associated risks). 

Ted Baker responded last Friday, saying it continues to make good progress with its transformation, and is emerging from Covid stronger and more financially stable. The board is confident in the companys independent prospects and would evaluate any offer against the strong shareholder value creation that it believes can be delivered as a standalone company.” 

Ted Baker - financial summary
Year end 30 January 2016 2017 2018 2019 2020 2021
Turnover (£ million) 456 531 592 640 631 352
Operating margin (%) 13.0 11.8 12.0 5.4 -9.5 -28.1
Operating profit (£m) 59.4 62.5 70.7 34.3 -60.0 -98.9
Net profit (£m) 44.2 46.6 52.7 24.5 -68.2 -86.4
Reported earnings/share (p) 80.8 85.1 96.3 44.7 -153 -56.2
Normalised earnings/share (p) 81.2 95.8 107 114 6.7 -26.0
Operating cashflow/share (p) 76.0 96.4 80.1 122 180 34.6
Capital expenditure/share (p) 164 80.0 66.8 55.3 47.2 18.7
Free cashflow/share (p) -87.6 16.5 13.4 67.1 133 15.9
Dividend/share (p) 38.9 43.6 48.9 47.7 7.8 0.0
Covered by earnings (x) 2.1 2.0 2.0 0.9 -0.9 0.0
Return on capital (%) 25.7 23.4 26.0 12.4 -21.7 -37.8
Cash (£m) 13.3 21.4 16.7 14.7 52.9 66.7
Net Debt (£m) 84.6 95.2 112 124 295 73.7
Net assets per share (p) 320 388 410 417 257.0 82.4
Source: historic Company REFS and company accounts

Offer hinges on what a few key shareholders might accept 

Some 27% of the equity is held by Toscafund, an opportunistic hedge fund that added 1% just recently but first bought 12% at around 373p at the end of 2019. The fund would have been able to average down at a price of 75p, hence possibly has an average price of 150p to 170p. So, does Toscafund want to wash its face and exit with certainty, or hope for the stock potentially to double and more? 

Other holders include Ted Bakers founder with nearly 12%, Schroders with possibly near 19% across different funds, and US asset manager Columbia Threadneedle with nearly 10%. Around 60% of Ted Bakers revenues are UK-derived, 30% US and 10% rest-of-world – helping explain US investor interest.      

Sycamore cannot easily bypass the board, however. With risks rising, it would be foolhardy to lose the company’s current CEO, or indeed other significant personnel. This can easily happen in the aftermath of a hostile takeover, if management is dissatisfied with a new owners conditions. 

If Ted Baker can recover net profits anywhere near what it achieved pre-Covid (see table above), then at 200p a share the exit PE would be 18.5x based on £20 million net profit, or 9.2x if £40 million profit. 

Private equity buyers often like to gear up companies with debt to enhance equity returns, but I cannot see that as possible at a still-delicate stage for Ted Bakers recovery. Its historic table does at least show material cash flow, albeit variable. 

My guess is a possible 170p to 200p strike range for a deal. While Oxford’s experience shows how current uncertainties can thwart an offer, those uncertainties may also make shareholders more willing to capitulate.  

Under takeover rules, Sycamore has until 15 April to act. At around 125p: Hold. 

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