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Daily Mail & General Trust Plc – Take-Private Offer Reads Like Bad Copy
Controlling shareholder RCL's indicative take private bid significantly undervalues DMGT
Welcome to Value Situations issue #6, and the fifth of the “quick ideas” editions. This week’s newsletter returns to Daily Mail & General Trust Plc following the announcement of a re-organisation and possible take-private by controlling shareholder Rothermere Continuation Limited.
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I hadn’t expected to return to DMGT so soon after last week’s quick idea write-up, but controlling shareholder RCL’s announcement last Monday has effectively put the company in play, prompting me to dig into this situation further.
Having spent some time parsing the somewhat vague indicative offer announcement and revising my SOTP analysis, I believe RCL’s offer is an opportunistic low ball one that significantly undervalues the business. It’s actually a somewhat ironic situation, when one considers how on the one hand the Daily Mail newspaper has been one of the most vociferous critics of “predators” buying-out British companies (see it’s near-hysterical reporting of the recent Morrison’s buy-out), yet on the other hand it’s controlling shareholder is attempting to buy-out all other shareholders at just ~8x PF operating income by my numbers, while clearly obscuring this manoeuvre by pointing to a seemingly generous cash special dividend (of which RCL gets ~36% of!) and a distribution of it’s shares in the Cazoo SPAC, worth a headline ~£970m before any tax as things stand.
I’ll start off by breaking down RCL’s indicative offer.
The Re-Org and Offer
DMGT has framed the situation as a “possible major reorganisation of DMGT, including potential RMS disposal, special distribution and possible offer by RCL for DMGT.”
So the offer is only an indicative one, comprising 3 components, as follows:
Disposal of RMS Insurance Risk business
Special Distribution to all shareholders, consisting of a cash distribution following the RMS disposal, and distribution of shares in the Cazoo SPAC
Buy-out by RCL of the remaining business, comprising the B2B property information and events divisions, the Daily Mail/MailOnline media business and the DMG Ventures investment portfolio
DMGT disclosed that it had received a number of inquiries about selling the RMS business, which appears to have triggered the wider re-org and buy-out offer. From my reading of it, there are two key takeaways regarding the possible RMS sale:
The deal is likely to happen - Firstly, while DMGT are careful to state discussions are ongoing and there is no certainty of a deal, I don’t believe they would have announced the disposal AND the take-private offer all at once unless they were confident the RMS deal was going to happen. I think we can therefore conclude the RMS sale will complete successfully.
Furthermore, the announcement states that if the deal happens, it will close in Q3 2021, which is less than 3 months away – in my experience its unusual for M&A deals (in the current climate in particular) to complete from start to finish in just 3 months. This clearly suggests a good amount of legwork, DD etc for the deal has already been completed.
Premium valuation - The Board of DMGT believe that the “terms of the proposed sale, if completed, would realise a premium valuation for DMGT's shareholders.” This suggests a trade acquirer, perhaps a major insurer or reinsurer, may be the likely acquirer, in which instance my previous 14x multiple which reflected an assumed small company discount is too conservative, and a higher multiple will be achieved for RMS.
As with all analysis relating to DMGT, this element comprises more than one part, in this instance a cash distribution and a non-cash distribution.
Firstly, the cash distribution will comprise the net proceeds received from the RMS disposal plus existing other group cash reserves, subject to deductions (yet to be agreed) for tax arising on the sale of RMS, pension scheme liabilities and other liabilities under various employee incentives arrangements.
It’s not possible to really know what the full extent of these deductions will be from the outside, however the Board helpfully provide a “broad estimate” of approximately £6.10 pence per DMGT share. At ~234m shares outstanding on a fully diluted basis, this implies a total cash reserve of ~£1.4bn being returned to shareholders. And that’s after backing out whatever tax and pension liabilities might arise. At ~56% of the current market cap, that’s certainly an eye-catching return to shareholders.
This also allows us to guesstimate the premium valuation that RMS might be going for. Of the £1.4bn in available cash reserves, if we back out the latest reported cash balance of £496m (per the H1 FY21 financial statements), this implies the after-tax sale proceeds from RMS is £932m. On an LTM basis, RMS generated cash OI of £33m, implying the premium valuation is in the ballpark of 28x! In reality, as this is a net proceeds number, the underlying multiple is likely 30x+.
Interestingly, this is in line with the 29.6x multiple achieved for the Hobson’s edtech business sold by DMGT back in February this year. While a very different business to RMS, this track record evidences DMGT’s ability to achieve premium valuations on monitising its assets.
Non-Cash Distribution of Cazoo Shares
The second component of the special distribution is the distribution of DMGT’s shareholding in Cazoo to DMGT shareholders. This investment is carried at £802m on the balance sheet per the latest H1 FY21 results :
Source: DMGT Half Year 2021 Results
As disclosed in the H1 results, “Cazoo announced a definitive business combination agreement with AJAX I, a publicly traded special purpose acquisition company (SPAC) listed on the New York Stock Exchange. The transaction values the combined company at a pro forma equity value of approximately US$8.1bn at US$10.00 per share. The combined value in cash proceeds and shares in the listed Cazoo, valued at US$10.00 per share as per the committed private investment in public equity (PIPE), that DMGT will receive on closing is expected to be approximately US$1.35bn.”
Given that AJAX I’s current share price is holding at $9.90, this implies current market-to-market value of DMGT’s Cazoo stake today is $1.34bn reflecting the discount to the $10/share price – this equates to a value of ~£962m at current USD/GBP fx.
This Cazoo distribution is subject to a potential adjustment for any tax liabilities of DMGT arising in connection with the distribution of the Cazoo shares. Furthermore, it is also subject to a six month lock-up period after completion of the SPAC merger expected in Q3 this year, and settlement of the Cazoo distribution cannot occur until the lock-up period has expired.
I’m not a tax expert but I think it’s prudent to account for some element of tax here. Very crudely, the total cost of DMGT’s investment is Cazoo is £117m, implying a gain of £845m on the current estimated value of £962m. Applying the UK corporate tax rate of 19% to this gain implies a tax bill of £160m. So netting this guesstimdated gain off the £962m pre-tax value indicates a net value of £802m, which coincidentally squares with the £802m carrying value on the balance sheet March 2021!
So I’ll assume the distribution value to shareholders as things stand today is £802m, which equates to an after-tax value of £3.42 per DMGT share based on 234.1m fully diluted shares outstanding.
DMGT Take-Private Offer
Now to the really interesting part of the re-org offer.
RCL are offering £2.51 per share, which ascribes an equity value of ~£588m to the remaining DMGT business based on ~234m fully diluted shares.
Pulling the offer components together, this implies a value of ~£12/share from RCL, a measly premium of just ~9% to the current share price, and a modest premium of ~16% to the pre-offer announcement price of £10.40:
Source: Value Situations analysis
On this analysis, the offer doesn’t appear that generous. But it’s only when we dig into the implied EV of the take-private itself that it becomes clear that RCL’s offer is a real low ball one that significantly undervalues the remaining DMGT business.
DGMT states that the take private offer implies an EV of ~£810m including current debt of ~£230m, for the remaining business, so let’s firstly remind ourselves again what this covers:
B2B property information and events divisions – LTM revenues of £212m / LTM cash OI of £38m
Daily Mail/MailOnline media business – LTM revenue of £590m / LTM cash OI of £62m (includes New Scientist magazine acquired this year also)
DMG Ventures investment portfolio – residual investment portfolio excluding Cazoo, valued at £88m in H1 accounts.
So RCL are putting a value of £810m on a business that in a bad, COVID-hit LTM period generated £802m in revenue and cash OI of ~£100m (before corporate costs of ~£36m).
It’s also worth emphasising that LTM performance reflects the Events divisions results for the period, where it effectively didn’t trade with revenues of just £6m and cash OI of negative -£1m. This compares to average annual revenues of £118m and average cash OI of £27m (23% margin) over the FY17-FY19 period before COVID hit. So LTM performance is clearly not representative or normalised earnings power.
To get to a normalised post-COVID set of trading numbers for the Events business, one could apply a 20% discount to the pre-COVID average revenues of £118m to allow for some reduced attendance at events and exhibitions, resulting in normalised revenue of £94m post-COVID and apply the 23% historic margin to get PF cash OI of ~£22m. On a PF basis then, RCL are paying £810m for a business that should do £890m in revenues and £123m of cash OI (pre-corporate costs) on a normalised basis:
Source: Value Situations analysis. Note DMGT do not report separate cash OI for the DM news and MOL segments; the above shows LTM cash OI of £55m for both in aggregate.
Next we need to deduct unallocated corporate costs of ~£36m to the above cash OI numbers to calculate group LTM cash OI of £64m and normalised cash OI of £87m.
We also need to remember that RCL’s implied EV of £810m includes the value ascribed to the remaining DMG Ventures portfolio and other JV/associate investments, which were valued at ~£93m (ex-Cazoo) on the recent H1 FY21 balance sheet. So the operating EV of the group per RCL is really £717m based on the company’s reporting.
So after netting out the group’s investment portfolio it appears that RCL are proposing to pay just 0.8x sales and ~8x cash OI on a normalised basis for the residual DMGT operating businesses:
Source: Value Situations analysis.
A multiple of just 8x normalised cash OI seems very low, when one considers that £61m or ~50% of cash OI (pre-corporate costs) comes from the B2B segment. Reverse engineering the £717m implied operating EV, and assuming the Consumer Media segment is valued in line with peer Reach Plc at ~5.5x suggests that RCL’s bid values the B2B segment at just 11x normalised cash OI:
Source: Value Situations analysis.
This again seems very cheap when one considers that B2B’s peers trade at a weighted average of ~17x as I outlined in my original write-up.
Finally, there’s a further nuance to RCL’s indicative bid price which may be overlooked amid the compelling headline terms of an RMS disposal at a premium valuation and a £1.4bn cash distribution equating to 56% of DMGT’s market cap.
RCL would not be putting up £810m of its own cash for the rump of DMGT. As ~36% shareholder it will receive ~£511m of the £1.4bn cash distribution, which would fund 63% of the $810m bid value. So assuming it recycles this into the take-private, RCL could acquire full control of DMGT with just ~£300m of new equity. A higher residual value for DMGT would clearly increase RCL’s equity requirement for the bid, so the proposal as presented feels like it’s been engineered to minimise RCL’s equity cheque for the take-private.
So having broken the offer down into its various components, its clear to me RCL’s bid is opportunistic and undervalues DMGT’s core operating businesses. So what might DMGT be worth in light of the latest information?
Revised SOTP Analysis
With the benefit of the information disclosed in last Monday’s announcement, I’ve revised my initial SOTP analysis, and am still getting an equity value of ~£16 per share for DMGT, after updating the analysis:
Source: Value Situations analysis.
The main revisions to the SOTP analysis are as follows:
RMS – now valued at 30x cash OI, as implied by the “premium valuation” analysis above
Property Information Division – I’ve removed the small company discount for this segment, given the track record of management achieving strong multiples, including the implied 30x on RMS and the ~30x achieved on the disposal of the Hobsons edtech business in February
Updated Cazoo to post-tax value of £802m, as outlined above
Updated Taboola investment to a post-tax value similar to Cazoo, with £6m SPAC deal value reducing to £5m after assumed corporate tax on the gain (cost basis is £2m)
Now includes ~£50m of other JV and associate investments which I omitted from my initial analysis; this £50m is the value per the latest reported financial statements and is now included with the DMG ventures portfolio (ex-Cazoo and Taboola) which is carried at £38m, resulting in total investments of £88m
I’ve increased the capitalisation multiple for corporate costs to 22x, based on the revised total operating EV per the SOTP of £2.1bn for the B2B segment plus £1.3bn for the Media segment as above, divided by the LTM PF cash OI number of £156m (includes RMS as RMS is included in the SOTP analysis).
Debt has increased to £230m as disclosed in the RCL offer announcement
Business was cash-flow positive in H1, so I continue to assume a cash balance of £496m as per H1 results
The net result of the revised analysis is that DMGT is worth ~45% more than the current share price, and 33% more than RCL’s implied offer price, and trades at a multiple of just ~0.7x its SOTP value.
Based on the SOTP analysis, the RCL offer clearly seems like an opportunistic low ball one, which ordinarily one would think will be rejected by shareholders. But here’s the catch – DMGT has a dual shareholding structure, split into voting and non-voting A shares.
Lord Rothermere and family control 36% of the non-voting A shares, but 100% of the voting shares. This means that any deal recommended to shareholders by the board that has his backing will be approved and the deal will go through on his terms. There is no real mechanism for minority investors to prevent this from happening. Perhaps then this dual share class structure justifies such a discount to underlying value?
In my view, there is still scope here for shareholder activism to drive a higher offer price out of RCL. The Daily Mail has been a vociferous critic of opportunistic acquirers picking off UK companies, yet here is RCL doing the very same thing. An activist or group of large shareholders working together could create sufficient publicity objecting to the RCL bid to compel it to offer improved terms. While RCL may very well disregard any such pressure or negative publicity, it’s worth pursuing for three reasons:
It could drive the share price above the implied offer from the RCL bid, making it very difficult for the board to credibly recommend the RCL offer when the market’s offer is clearly better.
It would increase awareness of the DMGT’s portfolio of assets, and may prompt an approach for other assets such as the Property Information division, which could unlock further value for shareholders where RCL cannot or will not.
If the pressure and scrutiny from such a campaign renders a take private too costly for RCL and it withdraws, the market may see this as proof of DMGT’s depressed value and re-rate the shares accordingly.
There is also the matter of RCL needing to agree a position with the trustees of DMGT’s pension schemes to ensure the schemes are not adversely affected by the re-org and take private, and in particular by the settlement of the Special Dividend. As these schemes are in a surplus and there is a funding plan in place for them, I don’t see this being a major obstacle to the deal completing.
In conclusion, I think it’s clear the RCL indicative offer substantially undervalues DMGT, with the implied bid value of £12/share representing a discount of ~25% to the underlying SOTP value of ~£16/share.
While the cash and asset distributions will turn shareholders heads, these really serve to distract from what is a truly low ball offer from RCL for the remaining DMGT business. At an implied 8x multiple, this seems like the kind of price that the PE “predators” decried by the Daily Mail would be delighted to get on deals.
In my view, the offer shouldn’t be accepted by the board or shareholders, but the dual share structure skews the odds in RCL’s favour. RCL have until the 9th August to either announce a firm intention to make an offer for the company or not. In any event, it’s clear there is value in DMGT’s shares at the current price with scope for further value to be unlocked.