Following protracted negotiations, Daisy Group has recommended a cash offer for the company from a consortium consisting of Toscafund Asset Management, Penta Capital and Matthew Riley, Daisy's chief executive and owner of 24.5 per cent of its share capital. The offer values the equity at £494m and equates to 13.4 times adjusted EPS for the last financial year and around 11 times cash profits to Daisy's enterprise value (market value plus net debt). That not only looks a fair price, but with the bid vehicle controlling 53 per cent of the shares in issue, and shareholders holding a further 39.6 per cent of the equity undertaking to accept the offer, this is a done deal.
It is also one that will give a boost to Oakley Capital's net asset value given that the take-out price represents a 35 per cent premium to Daisy's share price at the end of June when Oakley last reported its financial results. The shareholding in Daisy was in the books for £25.8m back then, or 11 per cent of Oakley's book value of £235.6m. However, the £9m valuation uplift since then means that Oakley's pro-forma cash now accounts for almost a quarter of its net asset value of £245m. Or put it another way, I reckon Oakley's book value per share is pretty close to 200p, of which net cash accounts for 47p.
That's quite a chunky sum considering Oakley shares are currently trading at 151p. It also means that once you strip out cash then investments worth 153p are being attributed a value in the current share price of only 104p, or 32 per cent less than their book value.
Harsh share price discount
Now a discount of that order would be justified if the portfolio has been underperforming. But that is clearly not the case as over the past five years to end 2013 Oakley Capital's net asset value per share increased by 85 per cent and was second only to SVG Capital among peers. Moreover, in the seven years since Oakley listed on the Alternative Investment Market, its net asset value per share has doubled, massively outperforming all the major UK equity market indices in this time.
Importantly, there are reasons to believe the company's current investments are capable of maintaining this impressive growth rate. That's because Oakley makes its money by taking stakes in private equity ventures established by its associated limited partnership, and provides mezzanine debt finance directly to a number of the portfolio companies with fixed interest rates ranging between 10 per cent and 15 per cent. The company also provides secured senior debt to certain portfolio companies at interest rates typically of 8.5 per cent to 10 per cent, and revolving credit facilities to the limited partnerships at an annual interest rate of 6.5 per cent. By my reckoning around £62m of Oakley's net asset value was accounted for by all these loans at the half-year end. So it seems harsh to say the least to value these loans at 68p in the pound as implied by Oakley's current share price discount to book value for its non-cash assets. Moreover, the annual returns generated on these non-equity investments have made a significant contribution to shareholder returns over the years.
Growth potential in private equity portfolio
Oakley's private equity investments also offer potential for valuation gains. Excluding the holding in Daisy, I reckon the portfolio is currently worth around £123m and includes a £27.5m financial interest in German business Verivox, a leading consumer energy and telecommunications price comparison website. Having been a shareholder in Verivox for five years now, this is a mature holding and, just like Daisy Group, looks ripe for crystallising gains.
Oakley is also making new investments and last month acquired a stake in Facile.it, Italy's largest car insurance broker and price comparison website. Interestingly, Italy has one of Europe's largest car insurance markets by value, but has been late to develop online with only 10 per cent of premia purchased on the internet. By contrast, around 80 per cent of the UK's £17bn market is purchased online, implying substantial untapped growth potential as the Italian market develops.
Other investments of interest include North Technology, the holding company of North Sails, a world leader in sailmaking with operations in 29 countries. Oakley Capital has a £18.5m financial interest in the company, having made two investments in March and June this year.
So with mature investments ripe for disposal, and Oakley recycling cash into ones with exciting growth potential for the future, I feel that the share price discount to book value is wholly unwarranted. True, Oakley Capital's shares have drifted modestly in a falling market since my last update at 165p ('A shrewd investment', 14 May 2014), but with the 14-day relative strength indicator on the floor, they are now more oversold than at any time since the summer of 2012. Interestingly, that price point marked a major turning point on the charts. On a bid-offer spread of 148p to 151p, I rate Oakley shares a medium-term buy and have a revised target price of 180p.
Please note that I have written three specific articles on financial markets in the past week, all of which are available on my homepage:
Equities: Eurozone growth scare spooks investors (13 October 2014)
Monetary policy: Normalisation is coming so plan ahead (17 October 2014)
Bond markets: Lessons to learn from bond market flash crash (17 October 2014)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
