Paul Sheffield, the boss of construction-led support services group Kier (KIE), has long admired another support services operation, May Gurney (MAYG) - for which May Gurney shareholders should be deeply grateful. It means that, following a profit warning last autumn, May Gurney's shares spent little time in intensive care. Now their price is back to the best levels of 2011-12, thanks to an agreed cash-and-shares offer from Kier that will create a group with revenues of £2.8m working for 65 local authorities doing jobs such as maintaining 0.5m street lights and collecting refuse from 3.3m homes.
- Low-risk way to make profits
- Pick up extra income
- Cost savings of the merger
- Enlarged group more broadly based
- Tricky to execute short sell
- Problem parts in May Gurney
The offer looks a done deal. Despite this, enterprising investors can still make worthwhile and low-risk profits from the situation. What's on offer is a classic 'bid arbitrage', where an investor simultaneously buys shares in the target company and short sells shares in the bidder. Then - when the transactions unwind - he or she should find themselves with more money than when they started.
An outline of the scenario is in the table, Money for Nothing - and
Referring to the table, steps 1 and 2 take place simultaneously. An investor short sells, say, 1,000 shares in Kier and uses the proceeds to buy 4,000 May Gurney shares. When the offer completes - some time in July - steps 3 to 6 kick in. Our investor receives 50p cash for each May Gurney share and a 5.6p dividend (in place of the final payout he would have received). He buys back the Kier shares he has short sold and - as the other part of the bid - receives just over one Kier share for every five May Gurney shares he owns. The table assumes that Kier's share price continues to drift away - usually the fate of acquiring companies - and, if our investor sells at 1,100p, he pockets £433 in about 10 weeks for no net outlay.
| Money for nothing | ||||
| Step | Action | Price (p) | No. of shares | Cash flow (£) |
| 1 | Short sell Kier | 1,167 | 1,000 | 11,670.00 |
| 2 | Buy May Gurney | -287.75 | 4,000 | -11,596.33 |
| 3 | Receive 50p/share cash | 50 | 4,000 | 2,000.00 |
| 4 | Receive 5.6p dividend | 5.6 | 4,000 | 224.00 |
| 5 | Buy back Kier | -1,100 | 1,000 | -11,082.50 |
| 6 | Receive 0.2095 Kier/share | 230.45 | 4,000 | 9,218.00 |
| Profit/loss | 433.17 | |||
| Note: dealing costs factored into 'buy' transactions |
Okay, this is where we throw in the caveats - but they're not all bad. The toughest challenge may be to short sell Kier shares, as there is only an outstanding short interest of about 150,000 shares. Still, making a short sale is not a prerequisite for profiting from the pending takeover. There is a useful return on offer - maybe 20 per cent-plus annualised - simply through buying May Gurney's shares.
Indeed, a short sale in Kier will be less profitable than simply buying May Gurney's shares unless Kier's share price drops below 1,100p. Meanwhile - and fairly obviously - the more that Kier's share price rises, the more that profits from the 'long/short' transaction disappear. Yet its price would have to rise 16 per cent above 1,350p in the next 10 weeks for losses to ensue - unlikely.
| KIER (KIE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,168p | MARKET VALUE: | £465m | |
| TOUCH: | 1,167-1,169p | 12-MONTH HIGH: | 1,449p | LOW: 1,099p |
| DIVIDEND YIELD: | 5.9% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 352p | NET DEBT: | 3% | |
| Year to end-June | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 2.11 | 24.8 | 44 | 55.0 |
| 2010 | 2.06 | 57.7 | 108 | 58.0 |
| 2011 | 2.12 | 72.5 | 166 | 64.0 |
| 2012 | 2.03 | 63.0 | 143 | 66.0 |
| 2013* | 1.90 | 62.0 | 135 | 67.0 |
| 2014* | 1.93 | 60.0 | 129 | 69.0 |
| % change | +1 | –5 | –4 | +3 |
Normal market size: 500 Matched bargain trading Beta:1.1 *JPMorgan Cazenove estimates (profits and earnings not comparable with historic figures) | ||||
Adventurous shareholders in Kier can see the transaction as a way of lowering their buying costs - and clearly they would have no problem finding stock to sell.
Bulls of Kier can see it as a cheap way in via May Gurney's shares. That way, they pick up extra income - the last dividend that May Gurney will pay and Kier's final dividend for the year to the end of June (likely amount, 45p) for which they will only have to tie up capital for a couple of months.
