- 305p a share for debt provider is fivefold increase on one-year low
- Founder signs binding letter of support
TDR Capital has revealed its intention to acquire Arrow Global (ARW), in the UK private equity firm’s latest bet on the domestic economy following its bid for Aggreko (AGK) and the leveraged buyout of Asda.
On Friday, TDR made a 305p-a-share all-cash proposal to the board of the distressed debt specialist, after earlier approaches at 250p and 265p in December, and 290p in January, were all rejected. The latest takeover offer is a 67 per cent premium to Arrow’s volume-weighted average market price over the past three months, and 36 per cent ahead of last Thursday’s closing price.
Arrow said it is considering the fourth proposal, although it described the previous approaches as having “materially undervalued” its growth prospects.
Investors with longer memories may still be hoping for more, given the shares traded as high as 307p just before the pandemic started to compound market fears that Arrow’s loan portfolio would face major impairments and complicate management efforts to de-leverage the balance sheet.
That pessimism pushed the stock to an all-time low of just 60p, although government support schemes, relatively stable credit markets and a run of third-party capital management mandates since then have led to a recovery in sentiment. Analysts at Jefferies, for example, have a target price of 420p on the shares, equal to 24 times consensus 2021 earnings.
One insider clearly thinks that rating looks rich. Zachary Lewy, Arrow’s founder and current chief investment officer, has signed a “binding letter of support” to vote in favour of the latest offer. Lewy has a total 2.14 per cent holding in the group, comprising a 0.3 per cent direct stake and shares beneficially owned via wholly-owned Arrow subsidiary AGG.
TDR now has until 8 March to announce a firm intention to bid for the company, although the acquirer’s evident keenness and Arrow’s brinksmanship suggest the final price could edge higher.
At the same time, we think 305p looks generous given net debt stood at more than 16 times cash profits at the end of September and operating profits barely cover the company’s interest payments. Nor is a bullish view of the equity reflected in debt markets, which have Arrow’s bonds on a negative outlook and continue to bid up the price of its credit default swaps. Hold at 288p.
Last IC View: Hold, 90p, 25 Aug 2020
