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On the cheap

After all, the offer – at 315p a share from Lovell Minnick, a financial services specialist – is just a few pence above 2018’s high and below the level that Taylor’s share price reached three years ago. As for a comparison with the prices hit in the early 2000s, don’t even ask – the shares were well clear of £4 in 2001 and 2002, and again in 2006.

Yet it seems fair to make these comparisons because Taylor runs along broadly similar lines as it did then except that now it is a better business; certainly that’s what its directors keep telling us and objectively it may be true. At the very least, it’s less of an insurance-industry hotchpotch. Today, it squeezes itself into just three divisions – claims management (in particular, loss adjusting); insurance management, chiefly running mutual insurance schemes for ship owners and for US dock workers, but also closed books of long-term policies; plus IT and software services for the insurance industry.

According to management’s underlying figures, in 2018 claims management and insurance management each generated roughly equal profits, either side of £12.5m, while the newer and much smaller IT services side only added a nominal amount.

Then again, the underlying profits bear superficially little relation to the statutory numbers in Taylor’s accounts, which has been a consistent theme over the years. In broad terms, underlying figures – the ones over which bosses have much leeway – generally look good, while the statutory returns mostly look poor. So much so that, for example, Taylor’s statutory pre-tax profit of £7.4m for 2017 was barely more than the level of 2013 (£6.9m) but then dived to just £0.3m in 2018. Simultaneously, basic earnings per share stayed within a range of 14p to 17p in the five years 2013-17 before ditching to a 5p loss in 2018.

In which case, Taylor’s shareholders might be grateful for any offer at all, except you would not think so if you listen to the company’s directors. In justifying their recommendation of the offer, they point out that revenues have grown by 115 per cent to £264m in the five years to the end of 2018, although omit to say that much of that growth came via acquisitions. They pat themselves on the back that the company has distributed £32m in dividends in that period, although this is borderline disingenuous since they also raised £30m from shareholders via a rights issue midway through it.

But their conclusion is characteristically lame of directors in this situation. Sure, Taylor’s plans can continue to deliver value for shareholders, they say. Not that they have actually delivered much value yet, a point the directors also acknowledge – “this has not been recognised in the share price... in recent years”. Given also that talks with other possible suitors have produced nothing better than the tabled offer, they conclude with words to the effect: “Better take it – this is the best you’ll get.”

So is it? The market does not know which way to jump. At 322p, the market price is at a premium to the offer, but one so slight that it hardly counts – just 1 per cent when we add in the effect of the 3.7p half-year dividend declared earlier this month.

Yet for all that Charles Taylor in practice is less than Charles Taylor in theory, the group has been a half-decent generator of cash. In the past five years, free cash flow – the lucre left over for shareholders – has averaged £26m a year, with – as you would guess – much variation around that average.

Still, imagine that historic average is the base-level figure for the future, what would it be worth to a suitor in effect buying it as an annuity? Depends on the rate of return required, but let’s put that at a restrained 8 per cent. If so, then Taylor’s equity would be worth £328m, 26 per cent more than the private-equity offer.

It’s also fair to assume that any half-decent private-equity house can raise loan finance at much less than 8 per cent. In which case, the cash flows that Taylor is likely to produce offer lots of scope to leverage returns on whatever sliver of equity is left in the business after refinancing. Put another way, the £261m being recommended by Taylor’s directors looks like it could be a steal.

The snag is that, in the real world, value is only ever what someone will pay and if, as Taylor’s directors say, no one is forthcoming with a better offer, then there is a problem. Presumably, the obvious candidates have run the rule over Taylor many times. Among London-quoted companies, Randall & Quilter (RQIH) might have been a likely bidder. Nowadays, however, it might only be interested in Taylor’s run-off books. Insurance services giants, such as Willis Towers Watson (US:WLTW) or Arthur J Gallagher (US:AJG), could snaffle Taylor without noticing, but are more conventional brokers than managing agents.

In which case, shareholders have a choice. They can tell Taylor’s bosses to try harder in their search for best value. They can tell them to believe their own public relations and manage the business better. Or they can accept an offer that looks better for the buyer than for the sellers. It does not take a genius to see which is the most likely outcome.