Gresham House (GHE:330p), a specialist asset manager and a constituent of my 2016 Bargain shares portfolio, will now take over the mandate to run LMS’s portfolio with the aim of maximising shareholder value through the sale of legacy assets in the near-term, some of which will be returned to shareholders through tender offers, and redeploying the balance of the cash proceeds on new investments in the smaller quoted company and private equity space.
Specifically, LMS’s portfolio will be aimed at investments capable of generating a 15 per cent net internal rate of return over the medium to long term and with potential for value creation through management, operational or strategic initiatives. The investee companies must demonstrate strong underlying operational cashflow characteristics and returns on capital invested. A maximum of 20 of these investments will account for at least 80 per cent of LMS’s net asset value (NAV), of which half will be in private equity.
LMS Capital had been winding down its investment portfolio and returning cash to shareholders, something I have been capitalising on, having initiated coverage at 54.5p ('Capital returns', 11 Feb 2011) and participated in four major tender offers pitched at net asset value (NAV) per share. Total cash returns received since I commenced coverage exceed the initial investment made. And there are more tender offers to capitalise on as LMS’s shareholders have just approved a further return of £6m through a tender offer priced at 84p per share to repurchase 7.14m shares in total.
The latest time and date for receipt of tender forms and share certificates (or TTE instructions) in relation to the tender offer is 1pm on 31 August 2016. I would recommend tendering your full allocation which, based on 103.6m shares in issue, is 6.9 per cent of your basic entitlement. Copies of the tender form may be obtained on request from Capita Asset Services who can be contacted on 0371 664 0321.
Opportunity to make excess applications
I would also point out that there is an opportunity here to tender more shares than your basic entitlement. That’s because Withers Trust Corporation Limited (as trustees of the Lord Rayne Will Trust), Lady Rayne-Lacey, Robert Rayne and other Rayne family members comprise a Concert Party for the purposes of the Takeover Code. The Concert Party holds 35.26m shares, representing a 34.04 per cent interest in the total share capital of 103.6m shares, and have agreed not to participate in any of the tender offers which were voted through at yesterday’s EGM.
This means that if all other shareholders tender 10.45 per cent of their existing holdings then LMS will buy back 7.14m shares at 84p each to return the full £6m to shareholders. Frankly, there is no downside here because if some investors only tender 6.9 per cent of their basic entitlement then it means those that decide to tender more will benefit. Either way I would strongly recommend you tender at least 10.45 per cent of your shareholding, and by the 31 August deadline.
LMS shareholders also approved two further tender offers at yesterday’s EGM which together represent 50 per cent of the net proceeds of future disposals of assets in the company’s existing portfolio. These additional tenders (and associated share repurchases) will return a maximum of £11m in total to shareholders. The Concert Party have agreed to not participate in either of these two future tenders.
Undervalued
So, with the company set to buy back 10 per cent of your holdings at a 40 per cent premium to the current share price, and the board committed to making two similar capital returns in the future, then LMS’s 32 per cent share price discount to NAV looks far too deep to me. Add to that the appointment of a far better investment manager – Gresham House Asset Management has outperformed the FTSE Small Cap index by 7.5 per cent since taking on the investment mandate of Gresham House Strategic (GHS:850p) in August last year – and the ongoing fall in sterling against the US dollar which is hugely accretive to LMS’s US investment portfolio, and I see upside in LMS’s shares.
Moreover, there is potential for new investors to warm to LMS as the implementation of the new investment strategy should make the shares an attractive investment to long term family office, high net worth and specialised institutional investors who want some listed exposure to Strategic Public Equity investment strategies.
LMS shareholders will also benefit from the value being created for Gresham House shareholders through this significant mandate win. That’s because as part of the three-year mandate agreement, LMS has been awarded £1m shares in Gresham House at 300p a share, and will receive a further £1.25m shares based on the average price in the 20 business trading days prior to the second anniversary of signing the asset management agreement. This will give LMS around 7.08 per cent of the enlarged share capital of Gresham House. In addition, LMS’s board have agreed to invest £1.5m in shares and warrants of Gresham House by mid-October this year to give the company an interest in a further 1.37m shares.
The bottom line is that I believe that this deal is not only good news for LMS shareholders, but for investors in Gresham House too, a point I made in my Bargain share portfolio half-year report earlier this week. I continue to rate shares in both companies a buy.
