Tindall abandons plan to privatise Warehouse – NZ Herald 30 Oct 2006

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.

The timeline:

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 14^th 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 27^th September Woolworths acquires 10.1% at $6.50.

Stephen Tindall goes on holiday on the 29^th September – saying he will consider next move.  On the 30^th 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?

This analysis of The Warehouse was originally in the Valuecruncher Newsletter dated 18 September 2006.

1. The Warehouse is New Zealand’s biggest retailer with sales of $1.7 billion.
Late last year the company retrenched from a value destroying Australian expansion – sold assets in Australia.

2. Foodstuffs took a 10% stake in July 2006 sparking potential takeover discussions.
Interests around the company’s founder Stephen Tindall control approximately 51% of the company.

3. Early September 2006 – consensus research analysts’ valuation (per share) approximately $4.70.

4. 14 September 2006 – Stephen Tindall announces plan to acquire 100% of the outstanding shares at $5.75 a share (previous share price - $5.11) with private equity firm PEP.

5. 15 September 2006 – share price closes at $6.01 (above stated offer price) with analysts saying that $5.75 is “opportunistic” and not enough.

Our take 

Attached is a valuation we have completed on the company using the annual results presentation of 8 September 2006 distributed by the company.

Our valuation places a mid-point valuation of $4.50 – which is in line with the previous analyst forecasts of $4.70.  We are comfortable with that valuation based on the information available.  We have used 3% earnings growth – in line with the information in the annual results presentation of flat real retail sales growth.

To get to the offer price of $5.75 requires the compound annual growth rate for the next three years to rise from this 3% to 10% – holding all other assumptions constant.  That is big in the retail market.  The Warehouse grew revenues in the 2002-2005 period at compound annual growth rate of approximately 5%.

To get to the current share price of $6.01 requires an 11% compound annual growth rate.  This share price places The Warehouse at the average of the Australian and US comparators we have examined – 12.7x historic EBIT.  It should be noted that this multiple is above giant US retailer Wal-Mart – currently trading at 12.4x historic EBIT.

To get the type of growth the offer implies suggests some quite radical plans for The Warehouse and retailing in New Zealand.  Now I am not an expert in the retail market – but Stephen Tindall most certainly is.  He is putting his wealth on the line and bringing some aggressive Australian private equity players with him that have a lot of cash in this.  If I was another retailer and potentially competing with The Warehouse – I would be very concerned.  The growth is going to have to come from somewhere – and The Warehouse signalled flat real sales growth in the retail sector only weeks ago.

Putting away my valuation hat and putting on my deal hat – I am surprised about the way that the deal was announced and the price.  It appears that the Tindall Group decided to put forward a full price – under the assumption that people would be happy with that.  However, Stephen Tindall is one of a handful of New Zealanders in the business world that people have significant respect for (others on the list – Graham Hart and well not many more).  The market (including commentators and analysts) then just said that the offer was “opportunistic” – despite placing an approximate $4.70 valuation on the company prior to the offer.  We think that the Tindall Group has been surprised by the market reaction – i.e. price over $6 a share.  The Tindall Group were never planning on going up from $5.75 – and we agree that it looks a very fair price at $5.75.  I might not have started quite as high as $5.75.

This is going to be very interesting to see played out.

View the Warehouse valuation