Stock In Focus: Will The Redde-Northgate Merger Create A Super Stock?

4th Feb '20 by Roland Head

4 comments 3817 reads

There are no new stocks I can add to my SIF folio this week. So instead I’ve decided to take a look at an interesting deal that’s due to complete later this quarter.

The planned merger between accident management firm Redde (LON: REDD) and van hire business Northgate (LON: NTG) was a big surprise to me. I couldn’t really understand the logic behind this combination.

The only obvious thing I could see that linked the firms was their chairman. Avril Palmer-Baunack was chair of Redde until the end of July 2019. Ms Palmer-Baunack then took over as Northgate chair on 12 August. On 29 November, the merger was announced.

Winners & losers?

My instinctive view is that Northgate shareholders are getting the worse half of this deal. Although the firm faces cyclical headwinds and some company-specific issues, fundamentally I think it’s an attractive business.

Former chief executive, Kevin Bradshaw, had been MD of Avis Europe for five years, so had experience in this sector. He was guiding Northgate through a turnaround programme aimed at maximising return on capital employed. This was (slowly) starting to deliver positive results, in my opinion. However, Mr Bradshaw wasn’t part of the merger plan, or perhaps didn’t agree with it - he stepped down with immediate effect when the merger was announced.

In contrast, Redde has delivered attractive shareholder returns since 2012, but is now facing a weaker outlook. Profit forecasts were cut in March last year, after a cautious set of interim results. Another earnings downgrade followed soon after, thanks to the loss of a major contract.

Regulatory change is also a permanent risk for companies such as Redde, which rely on income from personal injury claims. New rules on such payouts are due to come into force in April 2020. Is it a coincidence that this merger has been proposed just at this time? I note that Redde’s smaller rival NAHL has just issued a profit warning for 2020 and suspended its dividend.

I admit that my sceptical view on this deal is highly subjective and possibly mistaken. So I decided to take a fresh look at the proposed merger, using a quantitative approach. My aim was to try and…

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xcity

4th Feb '20

"I note that Redde’s smaller rival NAHL has just issued a profit warning for 2020 and suspended its dividend."

Redde (LON:REDD) and NAHL (LON:NAH) aren't the same type of business at all

dmcarver

5th Feb '20

I have been following Redde for the last several weeks hoping I would see other commentaries on the announced merger. My expectation was based on the announced terms: 0,3669 shares for each Redde share. The silence of knowledgeable analysts led me to believe I was mistaken in believing this to be a terrible deal for Redde shareholders. Now that we are on the verge of the deal going through, it looks as though my first impressions were well founded.

Since the announcement of the planned merger, the value of Northgate's shares offered in exchange for Redde's shares ran well below the latter's quoted price. Now, at today's quotes, the merger values a Redde share at 101,08 (275,5px0,3669) is in line with the Redde quote (101,80). In other words, the purchase price is finally aligned with the quoted price, but after a bloodletting on the part of both companies. The price of Northgate's shares has declined 21% since the day before the merger was announced (350p on November 28), while Redde's has increased by 3% (98,5 on November 28).

Considering that Northgate is reputed to be the weaker of the two but will become majority owner of the new group, one would have thought it would pay a premium for Redde. As the above figures indicate, not only is this not the case, but Redde shareholders will gain nothing in the exchange.

Particularly, it should be noted, that there is every likelihood that they will also take a cut in their dividend. Today Northgate's forward yield is 6,99% and Redde's 11,68%. The latter reflects Redde's miserable performance since February when it disappointed the market by failing to raise its dividend and then announced the loss of a major contract. To remain a Redde shareholder required an act of faith that 1) the dividend would at least be maintained, and that 2) management would recuperate or replace the lost business. In both cases, these hopes seemed to be in the process of realization until the announcement of the merger.

We now see that Redde will be taken over by a company in an entirely different business with significant management problems, that the dividend will almost certainly be cut, and not by a little, and that, under these circumstances and understandably, the investment of the shareholders of Redde, already compromised, is and will be further devalued.

The interests of Redde's management do not seem aligned with those of the company's shareholders. Yet the major stockholders have lined up to back the merger. What might be their and management's motivation?

Threepeat

A friend asked me look at this. My view was simply that Redde shareholders were getting a better deal than the bidder based on quants and the SP graph since the deal was announced. Looking at the Redde stock report cash and debt over the last few years seemed to say like Fontella Bass "Rescue me"
For me this a watch from the sidelines type situation.
Happy to be proved wrong, for everyone's benefit

Roland Head

7th Feb '20

Hi xcity,

Thanks for your comment. I'd be interested in know more about your views on these stocks.

My understanding is that both NAHL (LON:NAH) and Redde (LON:REDD) make a lot of money from personal injury claims. So I think they are comparable, in the context of the forthcoming regulatory changes.

I agree that NAHL doesn't do credit hire, so the two businesses aren't a direct match. But I think NAHL's profit warning relates to activities that Redde is also involved in.

Regards,
Roland

Stock in Focus: Will the Redde-Northgate merger create a super stock?

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Roland Head

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