A minimum of £50m is being raised at 220p a share through the issue of 22.7m new shares, representing 40.1 per cent of the existing share capital. The placing has been pitched in line with the current market price, but at a discount to its latest net asset value of 260p a share. The proceeds raised will enable the company to back at least five new investments being targeted by Marwyn Value Investors LP, an open-ended Master Fund domiciled in the Cayman Islands, which was launched in early 2006 with backing from more than 60 leading institutions and alternative funds including Marwyn Value Investors.
Marwyn Value Investors LP specialises in the acquisition of growth businesses by taking significant stakes in quoted portfolio companies. To date, it has so far invested a total of £300m in 15 companies and generated net returns of 233 per cent for Marywn Value Investors' shareholders since inception in February 2006, making it the second-best performing listed fund in private equity and UK small caps.
Recent divestments include its shareholding in FTSE 250 film producer Entertainment One (ETO:224p), a deal I commented on at the time ('Cashed up for cash returns', 22 Sep 2015), having recommended buying Marwyn's shares at 220p in May this year ('Exploiting a value play', 5 May 2015). It proved a profitable investment, returning a cash multiple of 4.3 times Marywn's original investment. The exit was well timed, too, because Marwyn achieved an average sale price of almost 290p a share in two separate transactions. That's materially higher than Entertainment One's current share price of 230p even after taking into account a subsequent rights issue.
Marwyn Value Investors' share of the £230m gross proceeds generated from the sale of the Master Fund's 26.9 per cent stake in Entertainment One was about £164m, of which £15.3m was subsequently returned to its shareholders last month through the redemption of 9.18 per cent of their shareholdings at net asset value of 268p. This means that if you followed my advice to buy Marwyn Value Investors' shares six months ago you will now retain 91 per cent of your original holding with a carrying value of 215p, a slight discount to the proposed placing price. Shareholder approval will be needed at a forthcoming extraordinary general meeting for the proposed fundraise to proceed.
The board is also proposing to declare an annual dividend of at least 8.255p a share paid in quarterly instalments and commencing in January 2016. A special distribution of 2p a share will be made in January, too. On that basis, the shares offer a prospective yield of 4.75 per cent.
Admittedly, it may seem odd to return £15.3m of cash to shareholders, propose a special distribution 2p a share at a cash cost of £1.1m, while at the same time raising £50m from new and existing shareholders in a placing. But the benefit of the capital distributions is that it enables some shareholders to take money off the table in a tax-efficient manner and importantly at net asset value, while offering the opportunity for other investors to recycle cash back into Marwyn's shares in the open market or by backing the proposed placing at the lower market price. It will have a more stable register of shareholders buying for the longer term as a result.
Ultimately, investing in Marwyn's shares is a vote of confidence in the ability of its investment advisers to replicate the success they have had over the past nine and a half years with the current portfolio, and the five new targeted investments. Bearing this in mind it's worth considering the companies in its portfolio.
Investments with potential
Having sold its first tranche of Entertainment One's shares in mid-July, Marwyn's Master Fund subsequently recycled part of the proceeds into Aim-traded Zegona Communications (ZEG:140p) by backing that company's acquisition of Telecable de Asturias, the leading quad play telecommunications operator in Asturias, north-west Spain. The Master Fund has purchased a total of 46.7m Zegona shares for £67m, representing 23.8 per cent of its issued share capital and accounting for 44 per cent of Marwyn's own net asset value before taking into account the proposed fundraise. The average buy-in price of Zegona's shares was just under 144p.
Zegona funded the €640m (£450m) consideration through a £251m placing at 150p a share, current cash resources and a new loan facility of €270m to settle Telecable's outstanding borrowings. The potential capital upside from Zegona's acquisition of Telecable aside, the board of Zegona is targeting a payout equivalent to a 3 per cent dividend yield at the 150p placing price, so this will provide Marwyn's Master Fund with a £2.1m income stream, which in turn is supportive of the £4.6m cost of Marwyn Value Investors' proposed 8.225p a share annual payout. Zegona also looks like a shoe in for inclusion in the FTSE Small Cap index at next month's quarterly review, having moved from Aim to a main listing early last month, so I expect some buying interest from FTSE Small Cap index tracker funds.
The Master Fund also invested £10m at 120p a share in Gloo Networks (GLOO:127p), a newly listed Aim-traded technology company established to acquire media companies where there is the potential to use data and technology to change their business models to unlock value and increase profitability. Gloo is led by digital strategy experts Rebecca Miskin (chief executive) who held high-profile positions at Hearst Magazines and Juan Lopez-Valcarcel (operations director), the former chief digital officer of international operations at FTSE 100 media and education group Pearson (PSON:812p). Gloo's intention is to acquire and operate businesses with an enterprise value up to £1bn, so expect a further fundraise to be backed by Marywn when its first acquisition is announced. This investment accounts for just under 7 per cent of Marwyn's net asset value.
In addition, Marwyn has a shareholding in FTSE 250 constituent BCA Marketplace (BCA:170p), Europe's largest car auction operator. The investment accounts for just under £21m, or 14 per cent of its net asset value, and the average buy-in price was only 134p, so the holding has performed very well. BCA reports its half-year results later this month.
Finally, Marwyn's Master Fund own a £13m stake in Marwyn Management Partners (MMP:3p), an Aim-traded company that is the ultimate majority shareholder in Le Chameau. Established in 1927, Le Chameau is a French heritage footwear brand specialising in the production of bespoke, handmade rubber boots.
So, by my reckoning, Marwyn Value Investors currently has about £37m of free cash after deducting £67m of liabilities on its last balance sheet. Add to that the £50m fundraise at 220p a share and it will have ample resources to diversify the portfolio further. Needless to say, with the progressive dividend policy confirmed, and net funds on its balance sheet accounting for a quarter of book value, I continue to rate Marwyn's shares a buy at 215p, a 17 per cent discount to the last reported net asset value. Buy.
Please note that I have written one other column today.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 2015)
■ Trifast: Buy at 116p, target 140p ('Engineering a chart break-out', 12 November 2015)
■ Software Radio Technology: Speculative buy at 23.5p, target 40p ('Break-even beckons', 12 November 2015)
■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 November 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 November 2015)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 November 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 November 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 November 2015)
■ LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 November 2015)
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 November 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 November 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
