This isn’t a big surprise – This was our analysis earlier. This is a great example of a valuation process in a mergers and acquisition setting. This is our analysis showing some of the principles we have previously discussed.
With The Warehouse under the current business plan the share price was at $5.11 with average analyst estimates at $4.70 in mid-September 2006. The Valuecruncher valuation for The Warehouse produced a mid-point valuation of $4.50 – Valuecruncher The Warehouse Valuation.
On the 14th September Stephen Tindall announces a plan to acquire 100% of the company and take it private (with Australian private equity fund PEP) to implement a new business plan – offering $5.75 a share.
The share price immediately goes above $6 and then on the 27th September Woolworths acquires 10.1% at $6.50.
Stephen Tindall goes on holiday on the 29th September – saying he will consider next move. On the 30th October Tindall announces he is abandoning plan to acquire 100% and implement new business plan.
This is what we saw happen:
Stephen Tindall has a plan that he believes will make The Warehouse more valuable than it is currently. He believes that is easier to execute as a private company. He does some analysis on the valuation of the new business plan against the current plan – that is being valued by the market. Tindall and PEP value the new business plan at a set level – for illustration purposes only we will use $8 a share. The Tindall/PEP strategy will be to implement the new business plan as a private company then to take the company public again down the track – to realize their gains.
Tindall/PEP looks at the current share price of $5.11 (pre-announcement share price) and decides to offer $5.75 for the shares. This is above the current share price – but below the valuation they view for the new business plan of $8 (that figure is just for illustration – and is not our view of the worth of the new business plan. We have no information to assess the Tindall/PEP potential plan). This is the Tindall/PEP group looking to pay away some of the value of their business plan over the current share price to achieve the transaction.
Tindall/PEP are then surprised as the market places a $6+ share price to complete the acquisition – expecting Tindall/PEP will have to go up from the $5.75 offer. I believe that this was a shock to Tindall/PEP as they viewed $5.75 as a very reasonable offer.
Then there is the further complication of competitor Woolworths acquiring a 10.1% stake at $6.50 – that allows Woolworths to prevent the privatization plan. For Woolworths it is a purely defensive play – it gets them influence in the process so they can be involved in the ultimate outcome. As we noted in our previous post – Stephen Tindall has a plan for the New Zealand retail sector (the new Warehouse business plan) and that would be a concern to all major competitors. Woolworth’s response was to get a seat at the table – no matter the cost.
With the share price around $6.50 the Tindall/PEP plan is in difficulty. To complete the transaction Tindall/PEP will need to pay at least $6.50 with their new business plan making the company worth $8 (our illustrative figure). Assuming it will take three years to implement the new business plan and to list the company and realize the gain – this would equate to a return of 23% but on a compound annual growth rate basis only 7%. Almost better to keep the money in the bank – and certainly not the returns that the likes of PEP are looking for. At $5.75 the return is 39% on a compound annual growth rate basis it would be 12% – assuming the $8 valuation is achieved after 3 years. The Tindall/PEP group will have to pay too much to acquire the company – seriously diluting the returns that they would get for implementing the new business plan (and executing a new business plan would be risky to begin with).
At this stage there is only one option for Tindall/PEP – to withdraw. And that is what has happened. If the share price falls back to a level that makes the plan attractive – we may see it resurrected.
This Blog focuses on valuation. From an investment banking perspective it appears that Tindall/PEP have been pretty naive if the plan was to implement the new business plan – and I believe it was. The Tindall/PEP tactics were not strong – they seriously underestimated market and competitor responses.
On the positive side for Stephen Tindall – he controls approximately 51% of the shares (157 million shares in total – some in a charitable trust). The Warehouse share price has risen $1.29 since the 14 September announcement (was $5.11 pre-announcement and is now $6.40). That is a wealth increase, based on those 157 million shares, of just over NZ$200 million for the Stephen Tindall interests. What have you achieved wealth-wise in the last six weeks?