Good morning!
Mothercare (LON:MTC)
Mothercare has responded to the news that American company Destination Maternity does not intend to make an offer for it after all. Surprisingly, Mothercare also notes that it "has had no contact with Destination Maternity since 3 June 2014". That is strange because news of Destination's interest in potentially buying/merging with Mothercare broke on 2 July 2014, so a month after the last contact between the companies.
As I mentioned in my report here on 2 Jul 2014, the takeover potential of Destination looked highly questionable, as it was clear from their accounts that they did not have the financial firepower to bid for Mothercare. So without explaining who was going to finance the deal & on what terms, their approach had little credibility.
I've added Mothercare to my new "Bargepole List" - companies where I feel there is far too much risk to invest. In this case Mothercare has too much debt, a horrible Balance Sheet including a pension deficit, and problems with onerous leases in the UK. Their UK operation looks very weak, although there is a decently profitable overseas operation. So it's really a question of whether the UK losses will pull down the whole group?
On balance, I suspect it probably won't, but certainly a rights issue (possibly deeply discounted) is looking increasingly likely - if I were their bankers I would insist on it. Banks don't like providing risk capital, that's the job of equity investors. So when Banks find themselves in a position where their lending has become risk capital, they look for a way out. Or at least that's how it's meant to work, but things have gone topsy-turvy in the last few years.
On the positive side, the prelims for y/e 29 Mar 2014 were not as bad as I expected, where in my review here, I concluded that the company probably wouldn't go bust, and it looked like management have stabilised the position. But who knows what will happen? It's too risky for me to even consider a long position. I'm not negative enough to risk a short position either, so will watch from the sidelines.
Here's the two year chart, with the beige line being the FTSE Smallcap Ex Investment Trusts Index (FTSE:SMXX) comparison…
