In this briefing:
- MYOB Setting Up As A Riskier Trade
- Aussie Equities Reporting Season Wrap: March 2019
- GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal
- China – Eurozone Negative Feedback Loop.
1. MYOB Setting Up As A Riskier Trade
When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.
The full write-up is MYOB: KKR Launches a Proposal. Lightish?
About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline).
Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,
Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. … The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)
Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.
David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.
The New News
While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”
The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.
2. Aussie Equities Reporting Season Wrap: March 2019
- Australia rallied strongly through a relatively solid reporting season, with the benchmark ASX 200 posting a strong 6% gain in the month. EPS was a little disappointing, given that only 50% of stocks that reported beat consensus estimates, with weaker-than-expected revenue the main culprit. EPS growth for FY19 was downgraded by 1.1%pts to 3.5%, but analysts left EPS growth unchanged in 10 out of 19 industry sectors. Materials, Pharmaceuticals, Consumer Services and Energy saw the largest downgrades relative to history after reporting half-year results.
- Government is having a Heavy Hand on Results. The Royal Commission in Financial Services is lifting compliance costs for the Banks, Wealth Managers and Mortgage Brokers. Similarly, the Royal Commission into Aged Care is raising the same costs for stocks in this industry. More stock-specific examples of Government intervention include AZJ, SKI, LYC and CAR (tighter credit supply from Banks).
- Cost pressures seem generally well-contained. US tariff-related cost pressures eased, but threats remain until a trade deal is negotiated with China. Compliance costs are hitting Banks, Wealth Managers, Mortgage Brokers and Aged Care stocks. However, the market seems to be more comfortable with the outlook.
- Growth Stocks Not Raising Guidance Were Hit. Growth names such as COH, CSL, TWC and TWE that delivered strong results without an upgrade to full-year earnings were dealt heavy blows. However, stocks such as WEB, which revealed new growth opportunities were rewarded handsomely.
- Good Management of Consumer-facing Stock Saves the Day. Filling slowing demand with higher-margin product offering delivered for JBH and SUL, while good performance from offshore stores came to the rescue for HVN. DHG saw weaker listings but fought this by selling higher margin products to agents. However, some stocks struggled. FBU, BLD, BAP ABC all succumbed to housing weakness.
- Grasping the Infrastructure Opportunity. CIM, MND and SVW all delivered on the back of the upswing in public and mining infrastructure spending. In contrast, LLC’s struggling Engineering Division is a good example of how a poorly managed business misses out on opportunities when industry conditions are buoyant.
- Model Portfolio Implications. We will soon update our model portfolio, but reporting season showed there is probably more upside in Resources than we thought at the end of last year. The worst seems to have passed for the Banks, but we struggle to see significant upside in earnings. We will retain a defensive bias in the portfolio, but most likely reduce it somewhat.
3. GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal
Graincorp Ltd A (GNC AU)‘s ability to generate shareholder value remains in doubt as LTAP enters its fourth month of due diligence. Yesterday, GrainCorp announced the first result (but overdue) of its portfolio review – the deal to sell its Australian bulk liquid terminals business to ANZ Terminals for A$350 million.
The option with the highest potential to unlock shareholder value remains the LTAP bid. The sale of the Australian bulk liquid terminals business would represent 13% of the current EV which in the absence of an LTAP bid, is unlikely to sustain GrainCorp’s current rating. However, we believe that the proposed sale is a necessary step to push LTAP towards a binding proposal.
4. China – Eurozone Negative Feedback Loop.
Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit, this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China.
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