That's because Aurora Russia and Elbrus Capital, a private equity business in Russia and the CIS, have entered into a sale and purchase agreement relating to OSG Records Management in a deal worth up to $47.8m, or £30.3m, before transaction costs. OSG is the leading document storage and records management company operating in Russia, Poland, Kazakhstan, Ukraine and other eastern European countries. Aurora owns 92.8 per cent of OSG and had planned a float on Aim after the company had published its full-year results for the year to 31 March 2013. But a cash disposal now provides more certainty than a demerger and, in my view, has realised maximum value for shareholders because it has not only been pitched at a premium to the £29.9m carrying value of the stake in Aurora's accounts, but the terms of the sale look reasonable and should be met.
Sound terms
On completion, $34.1m (£21.6m) of the cash consideration is payable to Aurora and a further $8.5m will be settled to an escrow account with Deutsche Bank in London, of which half - $4.25m - is payable 30 days following signing of the 31 March 2013 year-end accounts, assuming they meet management's expectations of cash profits, net debt and working capital. These figures have been provided to Elbrus Capital during due diligence. The remaining $4.25m in the escrow account is payable 12 months following closure of the sale subject to any warranty claim under the general commercial and tax warranties.
The final $5.2m (£3.3m) of the consideration will be paid to Aurora as long as OSG achieves cash profits of over $10m (£6.3m) for the year ending 31 March 2014. The amount payable under this earn-out will be reduced to zero in the event that cash profits for the year ending 31 March 2014 are less than $9m. It's therefore worth noting that Elbrus Capital has binding obligations to run OSG and account for cash profits in the same way as Aurora has over the past several years.
The total purchase price for OSG is $60.8m (£38.5m) after factoring in OSG's net debt of $10.9m and management options of $2.1m, which represents an enterprise value multiple of 9.9 times OSG's cash profit estimates of $6.1m (£3.9m) for the year ending 31 March 2013.
Exceeding expectations
The total purchase price is also the equivalent of 27p per Aurora Russia share, which is 5p a share more than I had factored into my break-up value of the company when I advised buying the shares three weeks ago at 30.5p.
Moreover, Geoff Miller, chairman of Aurora Russia, points out that: "The sale of our stake in OSG is an indication of the value in our portfolio companies and investor interest in high-quality CIS companies. The board continues to examine multiple options for exits from our remaining portfolio companies, to achieve maximum value for our shareholders." That's well worth noting because when I assumed a break-up value of 45p a share for Aurora this was factoring in a 40 per cent haircut to the carrying value of Aurora's stake in Unistream Bank and DIY retailer Superstoy in a fire sale scenario to value these stakes at £16.6m, or 14.8p a share. I also had assumed that an exit from Flexinvest Bank would bring in £9m (or 8p a share) after deducting the £3m value of the bank licence (these figures have been estimated by broker Jefferies). I also assumed Aurora's cash on the balance sheet, property assets and trade receivables would cover all liabilities including management fees, realisation fees and operating expenses.
But with the investment in OSG bringing in 27p a share (albeit 3p a share of that is dependent on the March 2014 earn-out terms being met and a further 2.4p a share will be held in escrow subject to any warranty claim), then a 45p-a-share net return to shareholders is starting to look conservative. That's because it in effect assumes a 60 per cent haircut on the 25p-a-share carrying value of the stakes in Unistream Bank and Superstoy, which is likely to prove overly cautious.
In the circumstances, I believe that a cash return expectation of 45p a share to shareholders could prove conservative. So, with Aurora shares now trading on a spread of 38p-39p, and further disposals likely to be announced in the months ahead (the board has made a commitment to realise "tangible value" for shareholders by August), I have no hesitation in keeping the shares on a buy with a further 15 per cent upside on the table. Buy.
Please note that I have published two articles today including one on a high-yielding cash-rich company which is expected to lift profits and dividends by over 25 per cent over the next two years (A solid income buy, 25 February 2013).
■ Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 35 online articles, all of which are available on my homepage. These include articles on the following companies:
IQE (Qualcomm news hits IQE shares, 22 February 2012)
Terrace Hill and Randall & Quilter (A flying start, 21 February 2013)
WH Ireland (Broking for a successful recovery, 19 February 2013)
Anglo Asian Mining ('Glistening investment loses its shine', 18 February 2013)
Communisis ('A fundraising well worth backing', 18 February 2013)
Town Centre Securities (A high yield property play in the north, 18 February 2013)
API ('A conundrum to solve', 15 February 2013)
Daejan Holdings ('Buy the breakout', 14 February 2013)
IQE ('Time to dial into profit', 13 February 2013)
Mountview Estates ('Chart break out for a solid income play', 12 February 2013)
Bellway ('Seeking Alpha', 11 February 2013)
Marwyn Value Investors ('A highly profitable arbitrage play', 11 February 2013)
Netplay TV ('A share set to hit the jackpot', 11 February 2013)
