Imagine you’re a reporter at an international news organisation who, due to a sequence of inopportune events or perhaps a clerical error, writes a weekend column about London markets. Imagine next that you filed a column on Friday morning about UK-listed asset managers, which floated the idea that rather than the defensive mergers widely predicted for the beleaguered sector, it could instead could see some predatory interest.
Now imagine that, by sunrise Saturday morning, the company central to your column’s conclusion announces an extremely defensive merger.
Jupiter Fund Management has agreed to buy Merian Global Investors, bringing together two of the UK’s most popular investment groups among retail customers.
Jupiter’s board confirmed over the weekend it was in advanced discussions with its smaller rival, which is best known for its stockpicker Richard Buxton, and announced on Monday that it had agreed a deal.
Under the announced terms, Jupiter would pay £370m for Merian through the issue of new shares, with Man additional £20m to be paid to Merian’s main shareholders — including Mr Buxton — as part of a deferred earn-out plan. The combined group would have £65bn of assets, creating the second-biggest manager of retail funds in the UK.
Jupiter’s 10 per cent gain at the London open gave it an advance of 15 per cent or so since the start of last week, which happened amid a bit of speculation that something was brewing. One idea in circulation was that Jupiter itself might be a target, perhaps for one of the midsized US asset managers that lacks a UK retail presence. But with the Merian talks having been running for several months, that idea looks to be no esta pasando and two-drunks style consolidation is what we’ll be getting. Here’s Shore Capital:
Given an acquisitive track record while CEO of Henderson, it was widely speculated the Andrew Formica’s appointment at Jupiter in March 2019 may herald a period of increased corporate activity at a company where this hadn’t historically been part of the culture. The December capital markets day had flagged a return to organic growth as a priority, alongside bolt-on acquisitions and ‘opportune UK consolidation’ We can only assume that Jupiter management regard this transaction as being in the latter category.
Unfortunately, recent large scale M&A in UK asset management has not proved to be a value-creative event for investors, with both Henderson’s merger with Janus and Standard Life’s takeover of Aberdeen failing to generate positive returns for shareholders and failing to arrest negative net flows. Jupiter has reported seven consecutive quarters of negative net flows and, given the drop in AuM at Merian since its creation, we assume flows have been negative here too. Jupiter has made substantial investment in its operational capability in recent years, including the implementation of the Aladdin system. Merian had put in place a two year operational and IT transitional agreement with its former parent (since re-named Quilters), so the ability to move to Jupiter’s systems may look attractive.
And Numis:
We note that both businesses are similar on paper (both c.90% retail client, c.75% UK client), but have lower product overlap than might be anticipated (main area of overlap: UK Equities). The deal therefore should broaden the product mix (and reduce concentration) whilst bringing together two culturally aligned firms with greater combined scale in our view (especially in a UK retail context).
Clearly, the deal itself does not solve the shorter term operational challenges facing both groups (company specific and active industry outflows, industry price pressure, industry cost pressures), but we note that a stronger combined group should emerge (especially in a UK retail context), giving the resultant group a better chance of dealing with those challenges medium to long term.
Jupiter’s guiding for low to mid-teen EPS accretion from 2021, improving from 2022. That implies about £50m of extra post-tax profit on the enlarged share count, which looks pretty aggressive given both companies’ key funds are haemorrhaging client money. Back to Shore:
We have struggled for some time with the investment case for Jupiter. Its high UK retail exposure and minimal performance fee eligibility (even less following the loss of Alexander Darwalll’s Jupiter European Opportunities fund) means we think it deserves to trade on a sector discount. … At the current price, we think the risk and rewards look evenly balanced but would be nervous if the share price were to rise at anything remotely close to the suggested level of eps accretion. The deal looks defensive in nature (as did Standard Life/Aberdeen) so we think investors should start from a slightly sceptical position, and we note an unusual condition which offers downside protection on the purchase price of up to £100m with reference to Merian AuM at 31st December 2021 (no reduction if the AuM fall by less than 15%, and the full reduction if AuM falls by 40% – sensible from Jupiter but hardly a sign of confidence!)
Elsewhere in M&A, Alstom’s in talks to buy a train set off Canada’s Bombardier with a potential value of around $7bn including debt. “The talks between the two companies come almost a year after EU competition authorities blocked a similar rail merger between Alstom and Germany’s Siemens over fears that it could jack up costs for signalling and next-generation high-speed trains,” reports David K in Paris. “EU competition chiefs had also dismissed a view that a tie-up was necessary if Europe was to compete with state-backed rivals from China.”
Same again? Maybe not, says UBS:
Overall, both Bombardier Transportation and Alstom generate about 60-65% of their revenues from Europe. However, there are potentially limited overlaps (mainly in very high speed trains and EMUs, where in some instances they could have up to 50% market share, according to press articles) between them in the rolling-stock and signalling markets, which was the main point of contention related to the blocked proposed merger of Alstom and Siemens Mobility. Hence, although it is too early to say, this deal could potentially face lower regulatory barriers from the European Commission.
UBS also has an equity-per-share sensitivity chart.
Tullow Oil has a duster off the coast of Peru. The Marina-1 hit target depth without finding any hydrocarbons in the primary formation. Operator Karoon Energy will plug and abandon. Tullow owns 35 per cent of the nothing, which it secured in a 2018 farm-in deal. Its share of drill costs are estimated at about $28m.
RBC with the numbers:
We included upside/risked value of +16p/-3p per share in our Tullow Total NAV.
Peel Hunt with the disappointment:
This was a relatively important well for Tullow given it comprises a third of the 2020 exploration budget and half of the 2020 wildcat drilling programme. The well failed to find hydrocarbon charge or good reservoir, meaning there is significant work to be done if a successful well is to be drilled in Peru.
Barclays with the lack of surprise:
The Marina-1 has had a low profile within the Tullow investment case, currently focused on the Board’s ongoing review of the business, its balance sheet and the production/reserve outlook for Ghana. However, it does mark the start of another exploration hiatus for the company with nothing else planned until late 2020 at the earliest. … The well was targeting a ~250mmboe prospect that could have de-risked material fallow-on potential if successful. We do not include any value for the opportunity in our 74p/shr Tangible NAV.
And Davy with the bigger picture:
The result of the Marina-1 well in the Tumbes Basin offshore Peru, while disappointing, should be seen in the context of the normal risk profile associated with drilling in an underexplored area. Notwithstanding the major group review underway, the well indicates that Tullow Oil continues to see exploration as a core activity. We believe that at current levels there was little or no value for the well built into the stock price.
NMC Health is making the most of its RNS Submit access while it’s still active, with three separate statements this morning where one would’ve sufficed. Founder BR Shetty has resigned as Joint Non-Executive Chairman, Hani Buttikhi has resigned as Chief Investment Officer and Abdulrahman Basaddiq has resigned as whatever he was. (The statement says that Mr Basaddiq was “a Non-Executive Director but not considered by the Board to be independent as a result of his being appointed at the request of Principal Shareholders.”)
An unintended consequence (we assume!) of Mr Shetty’s resignation is that he’ll no longer be bound by the Director/PRMR shareholding disclosure rules. He ought to still be classed as a PCA, however, so we should still expect a full and comprehensive update whenever NMC can get a clear trace on the location of several million shares that might or might not be under the control of its main investors.
There’s another agrochem toxic liabilities story, but this time it’s not Roundup. Bayer and BASF are a bit lower after a jury in the District Court of Cape Girardeau, Missouri, awarded $265m to the state’s largest peach grower, Bader, who complained about Dicamba-based herbicides drifting in from soybean and cotton fields in nearby Arkansas. Another 140 similar cases are pending later in 2020, Reuters reports.
Bayer and BASF (who along with Corteva are the main Dicamba producers) said they were “surprised by the jury’s decision” and plan to appeal as the herbicides “are safe when used as directed”. Here’s Commerzbank:
The background is that, first, US EPA registered ‘Dicamba’ in Dec 2016, only approved for ‘over the top’ use in GMO cotton/soy. Second, in 2017, farmers complained about damages from ‘Dicamba’ products ‘drifting’ to other fields, destroying 4% of nondicamba tolerant soybean fields or other non-GMO crops. In that year, the EPA agreed with manufacturers on measures to further minimize the potential for ‘drift’ to damage neighboring crops, including voluntary agreements to label changes imposing additional requirements for ‘over the top’ use from 2018 on. The EPA in October 2018 extended the approval of ‘Dicamba’ non-selective herbicide for ‘over the top use’ by another two years until December 2020 ‘unless EPA further extends it’. The EPA determined that extension with additional safety measures ‘will not affect endangered species’ and is ‘valuable pest control tool’.
In our view, the EPA’s extension of the Dicamba approval with tightened application rules signaled that ‘drift’ reports were rather due to inappropriate application, i.e. at excessive wind speed, than down to the product itself. However, the lost lawsuit leaves significant uncertainty on the financial impact, potentially attracting more plaintiffs as seen in the Roundup cases. Applying the now initially awarded sum of $265m to all 140 cases would point to potential total damages of around €33.7bn for both companies.
Allocating c. 2/3 to BASF would still imply a potential total damage risk for Bayer of c. €11bn. While it is too early in our view at this stage to put a number and a likelihood of damages payable to this issue, it comes at a time, when the glyphosate issue is not yet resolved.
To sellside, and HSBC likes Electrocomponents. “From defying the ‘slope of doom’, to riding the ‘ramp of recovery’,” it says, which is heady stuff for a fuse distributor.
Usually profit warnings for distributors roll down a slope starting with the highest inventory turn distributors, and in the end hitting the slowest. Electros has done a good job of defying the weakness in the leading indicators and grown faster than its peers driven by selfhelp and solid execution. Yes, there were estimate cuts but less than some feared. Markets have rewarded Electros for its perceived resilience against the ‘slope of doom’. During recovery, the slope of doom can also be reconstructed as the ‘ramp of recovery.’ If distributors sitting at the top of the supply chain appear to bottom out, we should expect a coming recovery in Electros. While it’s still early to call a recovery, the leading indicators are starting to turn with strong growth in semiconductor equipment billings and a sequential improvement in SIA shipments. Historically, the right time to buy slow inventory turn distributors is once the billings start to improve whilst inventory levels are still at low levels. Customer inventory is back at historic levels and order books for distributors are stabilising. Typically, customers continue to run down inventory levels until they see further clarity. However, once the orders start coming in, inventory re-stocking results in pent-up demand. During this period markets are usually prepared to look through the historic lag of high-service distributors and value them at depressed earnings on recovery multiples.
If ECM can continue to deliver top-line growth and operational efficiencies, we think the markets may be convinced that the transformation of the business has been structural driving a re-rating and winning back its status as a defensive compounder. Our current FY23e EPS estimate is 45.0p, we outline how this could rise to 53.4p including acquisitions.
Citigroup’s down to “neutral” on Meggitt:
Valuation now looks more reasonable after the strong stock performance, potentially stretched by M&A speculation, while supply chain pressures, along with the MAX groundings and temporary halt in production, add some uncertainty to the 2020 outlook. However, we still believe that there is some conservatism in 2019 civil aftermarket guidance and hence we remain above consensus EBIT. We raise our TP from 680p to 730p and tweak estimates.
Petra Diamonds’ interims are in line but come with an ugly outlook. The novel coronavirus will “significantly reduce activity across the pipeline”, apparently, so revenue gets guided lower. Here’s RBC.
This impact on topline comes in parallel with other negative impacts from continued poorer product mix at Finsch and Williamson. Due to this, the delivery of the group’s “Project 2022” program, targeting $150-200 mn of additional FCF, has been delayed somewhat to end FY22. This means that there is no change in net debt expected over the next 6 months to FY20 and this is likely to be maintained at around the current $596 mn level. PDL maintaining a level of +3.0x net debt/both last 12-month and our 2020E EBITDA forecast is likely to increase market concerns about a potential re-finance of the group’s $650 mn bond. The requirement to renegotiate covenants for its undrawn facilities is also likely to continue again, likely fuelling concern in the market even if this is something we don’t see as an issue.
There was also some operational commentary today that seems to indicate some near-term headwinds. At Cullinan volumes have been impacted by a slower-than-expected start-up post the Christmas period and at Williamson a recent pit slump is still being managed. Overall FY guidance still holds, but it feels like a Q4 weighting to volumes and financials could make for tougher trading for shares into and through the group’s Q3. We remain of the view that operational management are continuing to do a good job of controlling what they can and that a weaker ZAR will be a small but useful tailwind. The group continues to have c. $160 mn of available liquidity as at December 31 ($54 mn in cash) including undrawn facilities. We do believe PDL can cover its debt costs and, in our view, does not need to pursue a refinance solution for its $650 mn bond in the near term. However, today’s negative outlook comments and valid concerns of the coronavirus impact on diamond demand are likely to redouble focus on QoQ performance and cash generation. With a market cap of c. $94 mn on net debt of $596 mn shares are likely to remain volatile. We rate PDL Sector Perform.
What else? China markets up as stimulus overshadows death. … Rightmove says asking prices in January were up 0.8 per cent month to month. … Laura Ashley’s being squeezed by the bank. … Quantum dot maker Nanoco’s suing Samsung for patent infringement. … Versarien, the very heavily scrutinised graphene thing, has switched its Nomad to SPAngel. … Amplats CEO’s had enough. … And Softbank’s Vision has gone a bit Marty Feldman.
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