Small Cap Value Report (31 Jul 2017) - SPRP, XPP, FDM, RBG, SRT, UTW

The point about the announcement that I found interesting was:-

"This announcement is being made by Revolution without the prior agreement or approval of Stonegate".

Is that the normal form of words or is it an indication that Revolution Bars (LON:RBG) felt that there might be a better offer out there somewhere and wanted to let other potential suitors know that they needed to get their skates on?

Anyway, for what it's worth, I took the opportunity this morning to add a few more to the stockpile.

In reply to simoan, post #41

deleted

In reply to Carcosa, post #37

I'm not sure where Phil gets his 12% EBIT margin from. Looking at Stonegate's last accounts, their EBIT margin was more like 5% last year and 6% the year before that, which compares to RBG's 8% margin.

On a EBITDA basis, Stonegate were at an 11% margin compared to RBG's 13%.

Having said that, I do think Stonegate are quite savvy at M&A. They acquired Walkabout on a 5.0x EBITDA multiple (post synergies) and looking at their other acquisitions over the last few years, they've all been at single-digit multiples with some of them coming from administrators of failed companies.

So yes I think they could easily afford to go higher than 200p and still make it work for them, but for RBG shareholders that would probably require other bidders to show their hand.

In reply to bestace, post #50

Hi bestace,

As always, a big thanks for this research. As a very busy full-time worker and part-time investor I genuinely don't have time to hunt down the kind of detailed research  you regularly dig up and share and your input is very greatly appreciated in helping me kick tyres!

It seems given the better EBIT margins and cost efficiencies Paul mentioned that Revolution Bars (LON:RBG) would add real value to the Stonegate portfolio. Assuming they have finance in place and their DD doesn't turn up any nasties it's difficult to see them pulling out of the deal, so let's see if the RBG board can yet pull defeat from the jaws of victory...

Must admit I'm a bit puzzled by the market reaction today - when I woke up I assumed I would be considering selling at around 190p, not averaging up at 174p! The market rarely sells pound coins for less than 90p, so it seems it thinks this bid is far from a done deal.

All the best, Si

In reply to simoan, post #51

Hi Si,

Very kind of you to say so!

I think even though nothing is guaranteed, a deal with Stonegate is probably more likely than not, so I agree the market reaction today is a bit surprising and I bought some more shares this morning.

Just to fill in some of the gaps from my last post, Stonegate paid £39.5m for Intertain, the owner of the 30 Walkabout pubs. At their stated 5.0x multiple that implies they are targeting EBITDA of £7.9m post synergies.

Intertain's previous owner, Better Capital, were valuing the chain at £38m which was based on a EV/EBITDA multiple between 5.9x and 8.4x and net cash of £3.6m. That implies the chain was making EBITDA somewhere between £4.1m and £5.8m prior to the Stonegate acquisition.

That in turn suggests Stonegate were looking to increase EBITDA by something like 60% through synergies.

Clearly the situations won't be directly comparable but if Stonegate were able to raise RBG's EBITDA by a similar amount through synergies, they would be looking at EBITDA of £25m, or a company valuation of £125m (250p per share) on the same 5.0x multiple. And that doesn't count any growth from the future roll out plans.

They also paid £98m to acquire 53 sites from the Tattershall Castle group in 2015. They made £10.8m operating profit from this in their first year of trading, post acquisition so that was a multiple of 9x operating profit and presumably doesn't include all the synergies yet.

In reply to simoan, post #51

Hi simoan

I am no expert but I'd suggest that the 26p difference between the offer price and the current market price reflects the risk of the takeover not going ahead.

Cheers

Nico

In reply to Nicowilson, post #53

Hi nico,

Yes, the risk of a takeover not going ahead is always priced in in these situations but in my experience the market discount to the offer price is much wider than is usual.  The arbs normally don't let this kind of thing happen. so this is either free money or someone knows something that is not in the public domain. We will soon find out!

All the best, Si

In reply to Nicowilson, post #53

Difficult to know unless you also know the volume of each sale and the type of seller. I would have thought the steady zigzag upwards through today from an initial fall suggests some modest volumes of profit taking along the lines of "a bird in hand" slightly better matched by buying by those who like to see a chance of a quick 25p per share within a month.

In reply to Nicowilson, post #53

I assume that if Stonegate walked away, the Revolution Bars (LON:RBG) share price would fall back to a little above its previous level.. say, 140p

On that basis at an Revolution Bars (LON:RBG) share price of 174p, the market is currently pricing in only a 57% likelihood of a bid at 200p

174p = (200p * 57%) + (140p * (1-57%))

In reply to simoan, post #54

Hi Si

Closest comparator I've found is Punch Taverns (LON:PUB) where takeover price is 180p and current market price is 178p -
a discount of around 1%.

I accept that Punch Taverns (LON:PUB) will be trading close to the takeover price as the CMA decision is due on 22 August and all indications suggest that the CMA will let the deal go ahead.

Revolution Bars (LON:RBG) is trading at a discount to the takeover offer price of around 13%.

Cheers

Nico

In reply to Nicowilson, post #57

Nico,

There have been plenty of examples that I've had experience of over the years and just over the past 12 months includes the likes of Lavendon and Avesco, both which I held. I don't remember anything like this size of discount to the offer price even at this early stage. 

Sometimes the market exhibits strange behaviour and sometimes it's because someone knows something others don't. Apart from anything else you'd expect the bidder to be buying shares in the market when there is such a steep discount to their offer price. 

I can't help feeling something doesn't smell right...

All the best, Si

In reply to ds1980, post #23

Hi DS1980, your query "if it is taken over" prompted me to look a bit further into takeover rules and how some takeovers don't succeed. I don't know who owns what percentages of shares in RBG but there are some important percentage milestones to avoid minority holders being left with a small holding in an unlisted company.
Over 30% a holder may be required to bid for the whole company.
Over 50% a holder has legal control.
Over 75% a holder has the power to de-list the company unless opposed by another with more than 5%.
Over 90% a holder can compulsorily purchase minorities. If this doesn't happen minorities can require that it does.

See page 45
https://www.slaughterandmay.com/media/39320/a-guide-to-takeovers-in-the-united-kingdom.pdf

Closest comparator I've found is Punch Taverns (LON:PUB) where takeover price is 180p and current market price is 178p - a discount of around 1%.

But that really isn't a close comparator, Nico.

The Punch deal is agreed and just waiting for regulatory approval.

The RBG deal is a "Proposal" and 

Discussions between Revolution and Stonegate are ongoing regarding the details of the Proposal and Stonegate is undertaking its due diligence review. There can be no certainty that any offer for the Company will be made, nor as to the terms on which any offer might be made.

It's a very different situation.

Peter

In reply to simoan, post #58

Is the bidder actually allowed to buy at that sort of stage (announced but not agreed)?

Also if a bidder's due diligence fails it's not so interesting for them to have to sell a big pile of something they don't want just after the announcement they withdraw sinks the price...

In reply to andrea34l, post #44

Andrea. Thanks very much for clarifying. Maybe it's because it was a seemingly simple question for the investment aficionados on here. Sorry if it was. I buy and never sell shares so will see how this pans out. Ta.

In reply to simoan, post #54

While I admit the discount is wider than I would expect, I suspect that the reasons why the market is putting such a large discount is tied with the fact that the press release was done without the prior approval of the potential bidder. As Laughton (post #48) points out this could be an attempt to force out a second bidder or to put time pressure on Stonegate (Put up or stup up by 28 Aug). But I suspect the usual way to do this is to leak the story to the press and then come up with a confirmatory press release (in the morning). The release at 4:23 pm, not a time that I would expect anyone would plan to put out a price sensitive release, to me feels more like a hurried release after an (unplanned) leak and the release of the boiler-plate lawyer prepared press release (but I am only guessing).

Therefore, from the release, it is difficult to tell how far Stonegate are in the process, or how upset that their interest has been leaked. In addition we know that Stonegate's conditional offer is subject to due diligence- on a company that has been making ajustments to how it has previously accounted for certain items.

In reply to Samsgrandad, post #59

Samsgranddad. I would just point out that in the UK there are effectively two ways of doing a takeover of a listed company. If it is done as an offer then everything you say above is correct, I believe. If it is done as a Scheme of Arrangement, then the takeover going ahead is dependent on 75% of shareholders voting at an EGM to approve - then all shareholders are taken out (ie a minority shareholder cannot hold- out).

In reply to cig, post #61

cig,

AFAIK an acquirer can buy shares in the market at any point and often they already have holdings prior to a bid being public. That doesn't look like the case here but perhaps Stonegate were below the reportable limit? It will be interesting to see how this plays out anyway.

All the best, Si

I think usually a potential acquirer would only buy shares in the market, if they were potentially hostile, which doesn't seem to be the case here, as it is conditional on board approval.

On the practical side Institutional shareholders hold (according to Revolution Bars (LON:RBG) investor page) 82.6% of shares, so that's quite a small free element for pi's to chase, so maybe stock cannot be bought at keen enough prices to arbitrage because of the volatility of the price on such relatively small availability?

I think it must be driven by concerns as to whether the new FD really did "kitchen sink" all the issues or whether there are any more nasties lurking that would cause Stonegate to reduce the price they are willing to pay or walk away.

There's no way for an outsider to know so 50/50 seems fair odds to me. It's not tempting me.