By Paul Rickard

Perhaps it is the allure of the UK summer, with Wimbledon, Royal Ascot, The Henley Royal Regatta, the British Open, a test at Lords, or a Pimm’s or two in the late afternoon sunshine ... but for some reason, Australian companies are very favourably disposed to making big UK acquisitions. And perhaps for an entirely different set of reasons, these acquisitions have been a graveyard for Australian companies.

In fact, it is quite hard to think of a really successful acquisition in the UK by an Australian-listed company. Going back to the John Elliott inspired bid by Elders for Courage Brewery to “fosterise” the world, AMP’s purchase of Pearl Insurance and what would later become Hendersons, NAB’s purchase of the Clydesdale and Yorkshire Banks and Slater & Gordon’s purchase of Quindell, the list of failures is long. More recently, we have seen Wesfarmers lash out for the Homebase hardware business (too early to say how this is going). On Monday, Link Market Services announced the purchase of Capita Asset Services for a lazy £888m or approximately $1.5bn.

If there is one company that you would back to make a go of an acquisition, then that would be Link because John McMurtrie and his team have successfully integrated more than 40 businesses to make Link the leading funds administration and share registry business in Australasia, with a market capitalisation (pre-acquisition) of $2.8bn. But this is a game changer for Link, as the Capita business will deliver 41% of Link’s revenue and take offshore revenue to 45%. Net debt will rise from $283m to $923m, with the gearing ratio moving out to 39%. Strategically, it represents somewhat of a departure from Link’s expected growth trajectory of increasing share in the Australian superannuation administration business.   

Capita Asset Services

Capita Asset Services is being sold by Capita Plc. Deemed to be a “non-core asset” by Capita Plc, the Asset Services Business provides administration and registry services to fund managers, debt issuers and companies in the UK and Ireland. It comprises four divisions, which each contribute between 20% to 30% of total revenue.

  • Fund Solutions - which provides administration services to fund managers and has about 60% market share in the UK;
  • Shareholder Solutions - the largest division by revenue, which provides share registry services to UK companies. It is the third ranked registrar;
  • Banking & Debt Solutions - which provides loan servicing and admin services, as well as recovery of non-performing loans, to debt funds, investment banks and pension funds. 76% of the revenue is sourced from Ireland; and
  • Corporate and Private Client Solutions - which provides trustee/directorship services, trust administration, company secretariat and finance and accounting to major corporates, family offices and high net worth individuals. 

Revenue has grown from £284m in CY14 to £316m in CY16, a growth rate of 5.5% pa. EBITDA has largely remained flat, from £70m in CY14 to £72m in CY16.

Link says that the deal has attractive acquisition metrics in that it is EPS (earnings per share) accretive by around 17%. The implied acquisition multiple of approximately 12.4 times enterprise value reduces to 10.3 times once expected run-rate efficiency benefits of at least £15m are factored in.

Strategically, Link says that the acquisition: 

  • Has a strong strategic fit, and is aligned with Link’s growth strategy (for example, exposure to the outsourcing trend in an environment of increasing regulatory complexity);
  • Is an extension and diversification of Link’s business profile and geographic exposure (non-Australasian revenue will rise from 7% to 45%);
  • Provides immediate scale and leadership in the UK and a growth platform for Europe;
  • Link can drive significant growth and efficiencies post acquisition through the application of technology and investment, a shared services model, property optimisation, and enhancing products and services to drive revenue; and 
  • The Capita business has a resilient and defensive financial profile with growth opportunities.

Interestingly, the seller (Capita Plc), describes their rationale for the sale as to “simplify and streamline Capita Plc by repositioning the Group and refocusing on delivering technology-enabled business and customer management solutions that make business processes smarter and deliver better customer service”. In other words, they didn’t see this as much of a technology enabled business - or certainly one that warranted much further investment.

It takes two to tango - I guess that's what makes a market.

Funding

The acquisition is being funded by a 4 for 11 pro rata renounceable entitlement offer to raise $883m, with the balance of $664m coming from existing cash and available debt facilities.

The entitlement offer is set at $6.75 per share, a 13.8% discount to the closing price on Friday 23 June and a 10.5% discount to the theoretical ex-rights price of $7.54. The first part of the offer, to institutional investors, was completed on Wednesday. The offer to retail investors will open on Wednesday 5 July and close on Monday 17 July. Retail entitlements can be traded from today on the ASX and will trade under stock code LNKR.

Retail investors can elect to take up their entitlements by buying new shares at $6.75, sell their entitlements on the ASX (trading ceases 10 July), or do nothing. If they take no action, their entitlements will be auctioned in a book-build.

The Brokers

The Brokers have given the deal an initial tick of approval. Noting the forecast accretion in EPS, each of the major brokers has upgraded their target price:

  • Citi - from $8.25 to $9.20, upgrade to buy from neutral
  • Deutsche Bank - from $8.70 to $9.50, buy retained
  • Macquarie - from $9.20 to $9.50, outperform retained
  • Morgans - from $8.16 to $8.29, hold retained
  • UBS - from $8.10 to $8.55, neutral retained.

According to FNArena, the consensus target price is now $9.01, well above the theoretical ex-rights price of $7.54. Not surprisingly, the institutions have also supported the entitlement offer, with a very high percentage of eligible entitlements being taken up.

Jury will be out for some time

This is a transformative deal for Link and the market’s initial assessment is positive. However, because it won’t be complete until November/December, it will be many, many months before the market gets a good read on how the acquisition is progressing.  

And notwithstanding Link’s tremendous track record with acquisitions, history is against it in making a UK acquisition like this work. Being EPS accretive is a positive, but the strategic rationale is sound rather than compelling. The market will thus be cautious in passing judgement.

My sense is that Link is likely to experience a period of share market underperformance as the jury waits to assess the acquisition and the market absorbs the stock from the entitlement issue. It may not underperform in weak markets, but if the market rallies, Link could lag. Some contraction in the PE multiple is likely. Hold.