By Alistair Blair, 17 June 2010
A reader emailed me about
The shares in fact touched £12, but that was a lot more to do with the tech bubble than with my insight. In fact, 18 months after the original piece, I recommended selling the shares at 500p due to my worries about the bubble. Later, I bought back in at between 52p and 80p. Now, its directors are recommending an offer of 47p. I should point out that the bought the shares at 16p - now that was a well-founded purchase.
Trafficmaster's original promise was clearly unfounded. But it always seemed an honestly managed company and it has made a success of an initially dubious US acquisition in the fleet management business. Last year, US fleet management income rose from £30m to £37m, whilst the income of the original traffic data business declined from £6m to £5m. Including abandoned efforts to replicate its UK traffic data collection network in Germany, France and Italy, I would guess that this business has absorbed about £60m of investment. Promise? Bah, humbug.
Trafficmaster was not the only experience from which I learned that I am a lousy investor in new technology. (I also learned a lot from Alasdair Nairn's excellent book. "Engines That Move Markets", which covers the giant technology investing stories from railroads to the internet.)
The reader asks: "Why are management recommending such a low offer?" I have no doubt that he speaks for many private investors who were drawn in by Trafficmaster's high-profile past. The company has scraped through extended bad times and those who never gave up on it will be encouraged by this deal too see value well in excess of 47p around the next couple of corners.
They have my sympathy. The offer values Trafficmaster at 10 times the earnings projected by its broker for the year to December 2010. Even the offer document blushes as it goes through the motions of justifying the price. The paragraph headed "Why the Independent Directors consider the Acquisition to be in the best interests of Shareholders" says the offer puts an enterprise value on Trafficmaster of 1.4 times its revenues, whereas the corresponding figure for "a peer group of North American fleet management companies" is 1.3 times. I make that a premium of under eight per cent. I looked up all six of the companies quoted: they were a whale (Trimble) and five minnows. It struck me that Trafficmaster was well-placed amongst them.
But a takeover bid does not have to be generous; it merely has to attract acceptances. This offer is supported by Aberforth and
Private investors might suspect that the top executives' salary and bonus arrangements will be transformed by the deal, but in fact they will be unaltered even though several of them are required to up sticks to California. True, they get a prospectively juicy equity deal, but it will only pay out if Trafficmaster succeeds consistently, and that would represent a change of spots.
It does seem clear that consolidation lies ahead in the US fleet tracking sector. Trafficmaster will need further capital to play its part in this development, and it says its new parent will be a more reliable source of this capital than existing shareholders. However, it raised £4m of new equity only three months ago and its progress since then has been good.
The deal seems to be the result of a pretty serious auction process. The offer being made was one of three on the table, and whilst it is not impossible that a higher offer will emerge, that's unlikely to be seriously ahead of this one.
I'm struggling to condemn the deal outright, but it is impossible to be warm about it. The only scope for it to be shoed out is for Legal & General and Gartmore to offer a spot of leadership, fast. Over to them.
ABOUT ALISTAIR BLAIR...
Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.
You can leave comments or questions for Alistair below, or read more of his comment columns at his IC home page.
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