Since then, Aim-traded KBC Advanced Technologies (KBC), a consultancy and leading software provider to the global hydrocarbon processing industry, has seen a 185p-a-share recommended cash offer from Nasdaq-quoted Aspen Technology trumped by a knockout 210p-a-share cash bid from Yokogawa Electric, a take-out price representing a 200 per cent premium to my buy-in price of 69p when I initiated coverage ('Fuelled for growth', 5 May 2013).
I also recommended exiting Aim-traded Plethora Solutions (PLE), a UK-based speciality pharmaceutical company dedicated to the development and marketing of products for the treatment and management of urological disorders, to crystalise a profit after it was taken over by Hong Kong-listed Regent Pacific (Hong Kong Stock Code: 575) in an all-share deal (‘On the takeover trail’, 10 March 2016). This means that the average gain on the 11 takeovers I mentioned in my January article is in excess of 50 per cent per holding and that includes a 22 per cent gain on shares in Renewable Energy Generation (WIND), an Aim-traded renewable energy company I highlighted last autumn ('The takeover game', 11 Nov 2015).
To that growing list we can now add a likely stock market exit for Wireless Group (WLG:310p), an operator of regional radio stations in the UK and Ireland and of the commercial sports station talkSPORT. That's because late last week media giant News Corporation launched a £220m recommended cash bid for the company. I have more than a passing interest here as I advised buying the shares at 185p last autumn ('On the right wavelength', 26 Oct 2015), reiterated that advice at the start of the year ('An awesome foursome', 18 Jan 2016), again in the spring ('Talk is cheap', 4 Apr 2016), and for good measure a few days before the bid was announced (‘Wireless Group set to score’, 23 June 2016). The 315p a share take-out price represents a thumping 70 per cent plus bid premium to those entry points, and shareholders get to keep the final and special dividends, worth 13.75p a share, payable in mid-July.
Frankly, it’s difficult to see any other bidder trumping this generous offer as it represents a heady rating of 21 times current year EPS estimates and already has the backing of shareholders controlling 35 per cent of the share capital. True, the market isn’t expect a bidding war which is why the share price is 5p below the level of the cash offer, but you have nothing to lose by holding on and seeing whether one emerges rather than cashing out now. Sit tight.
Bioquell a sitting duck
I don’t expect the M&A activity to end here either. As I highlighted in my recent Bargain Shares portfolio udate, Andover-based Bioquell (BQE:145p), a provider of specialist microbiological control technologies to the international healthcare, life science and defence markets, is a sitting duck to be taken over. Having returned £40.8m of its cash pile through a tender offer at 200p a share which explains last month’s share price adjustment, the company remains in bid talks with several parties regarding the sale of its retained biocontamination control technology products division.
Strip out net cash of £6.8m and Bioquell's ongoing operations are being valued at £26m, or only 7.6 times last year's cash profits. There is no bid premium embedded in a price-to-book value ratio of 1.4 times either. That’s good news if you want to play this takeover situation given that I expect at least a 20 per cent bid premium in light of the fact that a purchaser could easily take out £1.5m of annual central costs. Capitalise that saving and it’s worth 40p a share to an acquirer using a normalised tax charge.
On a bid-offer spread of 143p to 145p, Bioquell’s shares rate a value buy and I would recommend using the cash received from the tender offer to buy back shares in the market at the lower price. Buy.
MXC deal making
A month ago I initiated coverage on the shares of Aim-traded MXC Capital (MXCP:3.05p), a technology-focused merchant bank run by a management team that has been successfully backing investee companies they represent as well as earning lucrative advisory fees (‘Deal makers’, 31 May 2016).
At the time MXC’s shares were trading in line with book value and the entry point of investors who backed a placing at 2.55p a share which raised £6.9m to fund more deals. Since then the company has cashed out £10.44m by selling 5.8m shares in Redcentric (RCN:164p), a UK IT managed service provider. MXC still owns call options over 1.7m shares with a strike price of 32p, and a further 7m call options with a strike price of 80p. These are ‘in-the-money’ to the tune of £8.1m. Redcentric is a company my colleagues on the IC companies team are favourable on, reiterating their buy tip a few weeks ago post results. They have good reason to be because the shares are only priced on 14 times earnings estimates, a modest rating for a company set to deliver double-digit earnings growth for some time yet. I can see why MXC is retaining an interest.
Importantly, the cash proceeds have been put to good use as MXC is acting as lead adviser and investor to the Alternative Investment Market flotation of Tax Systems (TAX), a leading supplier of corporation tax software to the large corporate sector and the accounting profession in the UK and Ireland. In fact, 43 of the FTSE 100 companies and 19 out of the top 20 accountancy firms are among its customers.
MXC subscribed for £8.7m of new shares as cornerstone investor in a £45m placing, which, combined with £30m of new debt facilities, financed the acquisition of Tax Computer Systems by Aim-traded Eco City Vehicles (ECV), shortly to be renamed Tax Systems (TAX). MXC originally subscribed for 109m new ordinary shares in cash shell ECV at a cost of £1.33m in December 2015, and was granted evergreen warrants over 5 per cent of the share capital at a price of 1.22p. ECV is having a 50-for-one share consolidation and the new shares will be issued at 67p in the placing.
This means that MXC will own 15.2m shares in Tax Systems when the shares list on Aim on Tuesday, 26 July, or 20 per cent of the enlarged share capital. MXC will also own evergreen warrants over 6 per cent of the shares in issue, the majority exercisable at 67p, but some at 61p.
Sensibly priced acquisition
It looks a sensibly priced acquisition as the consideration equates to a cash profit to enterprise value multiple of 11 times, a fair price for a business with a 25 year track record and one generating annual revenues of £12.8m, of which over 90 per cent are recurring, and a 52 per cent cash profit margin. The opportunity here is to invest in Tax Systems’ product portfolio and team in order to drive organic growth whilst seeking opportunities to acquire companies with complementary products and services. Indeed, the company’s client base currently comprises 900 corporate customers and over 120 accountancy practices including 56 of the top 100 accountancy practices in the UK. In the UK and Ireland, there are estimated to be around 7,500 large corporate entities and over 3,000 accountancy practices with more than two partners, providing significant opportunity to increase market share.
Furthermore, the government estimates there are 33,000 medium sized companies in the UK and Ireland, a market which Tax Systems currently does not address. The board believe that a SaaS version of Alphatax, the company’s end-to-end tax compliance process software product, with appropriate functionality would be well-placed to penetrate companies within this market segment which currently manage their own tax in-house.
The bottom line is that MXC offers a smart way of gaining entry to Tax Systems’ flotation on the same terms as the other 10 shrewd fund managers backing it. I would also flag up that the cash from the Redcentric sale more than covers the £8.7m investment being made by MXC, so the company still has a war chest of around £14.7m including borrowing facilities to target further investment opportunities.
On a bid-offer spread of 2.95p to 3.05p, up from my 2.65p advised buy-in price, I continue to rate MXC’s asset backed shares a buy and maintain my 3.75p target price.
Into orbit
Shares in Satellite Solutions Worldwide (SAT: 7.5p), a satellite internet service provider that provides an alternative high-speed broadband service, surged after I recommended buying at 5.5p ('Blue sky tech play', 21 Mar 2016), and duly hit my 12-month fair value range between 9p to 10p. I subsequently advised running profits at 8.5p (‘Hitting target prices’, 21 April 2016).
Since then the company has agreed a £2m unsecured loan note with Business Growth Fund which carries a fixed coupon of 10 per cent, and is repayable in full after 12 months. The funds strengthened SSW’s balance sheet and are enabling it to continue its organic and acquisitive growth strategy as it seeks to consolidate the satellite broadband industry across Europe. The board hasn’t wasted any time putting the cash to good use, announcing at the end of last week that it had completed the smaller of two French acquisitions and expects to complete the second shortly.
The acquisitions add 2,400 customers to the customer base, cementing its position as the second largest satellite broadband provider in France as well as extending the suite of products on offer to customers. The French Government's subvention scheme, which has a commitment to enable 150,000 broadband subscribers on satellite by the end of 2018, has helped underpin SSW’s strong organic growth in the country. Last year's acquisitions of Sat2Way and Vertical Connect are now fully integrated and contributing to profits. Moreover, the board is evaluating “a number of significant acquisition opportunities.”
The point is this progress is not being fully priced in. That’s because analysts believe SSW should be able to produce revenues of £15.6m in the 12 months to end November 2017 to generate pre-tax profits of £1.4m and EPS of 0.47p. Trading on 16 times likely earnings, and with forecasts skewed to the upside as the board acquires more European satellite service resellers, I rate the shares a buy.
K3 earnings enhancing acquisition
Retail software company K3 Business Technology (KBT:337p), the Salford-based supplier of software to the retail, manufacturing and logistics sectors and provider of managed IT and web-hosting services, has made its second acquisition in the past 10 weeks.
The company is acquiring Merac, the author of an electronic point-of-sale and management system for the visitor attractions and leisure sector. Merac's customers comprise many of the UK's leading historic houses, zoos, and theme parks, including Stonehenge, Longleat Safari Park, Castle Howard, Adventure Island, and Wookey Hole Caves.
It’s a well structured deal as K3 is paying an initial cash consideration of £1.27m, and an earn-out up to £175,000 is payable next year depending on performance. In the last financial year, Merac made an adjusted pre-tax profit of £0.33m on revenue of £1.27m, so the bolt-on deal will be earnings accretive. It also adds further substance to analyst forecasts that K3 can lift EPS by 10 per cent to almost 27p in the 12 months to end June 2017.
On 12.5 times forward earnings, and offering 25 per cent upside to my 425p target price, I rate K3's shares a decent buy at 337p. Please note that I first advised buying the shares at 220p ('Tapping into retail growth', 16 Sep 2014), and recently published a detailed analysis of the company for online subscribers (‘Plug in and play with K3’, 20 June 2016).
