REH (ASX) Ann: Acquisition of Morsco and Capital Raising Presentation

Originally posted by neoteric ↑

After spending some time thinking this transaction through, I've concluded that IMO it is likely a win/win/win scenario.

The Winners
1. I think it is fair to say this is a pretty good outcome for Advent. This kind of multiple is on the higher end of the spectrum of what PE usually seek when they want to exit a business.
2. There's $58m of transaction costs in the transactions. Advisers, management consultants and underwriters are all taking a cut from the raising and are well remunerated here.
3. Financiers do well too by extending $1.5b to a client with a strong credit rating and financial / operational track record. Finance institutions stand to earn a reasonable return over an extended period.

But in my mind I couldn't find a place for shareholders in the list of winners. The absence of any mention in the presentation in the section discussing strategic rationale about creating shareholder value is telling - as this is the key factor in all of this for us shareholders. While there is talk of EPS accretion, that does not of itself ensure creating shareholder value particulary if that earning accretion comes in step with a material leveraging of the company's assets.

While the current cost of debt may be exceeded by the bought earnings leading to earnings accretion, this may be temporary until interest rates rise in the future. It also presumes that earnings pan out as expected, but if everything does not go right with an acquisition (pretty likely in my experience) then the EPS accretion can disappear easily, and we are only talking about modest single digit EPS accretion here, there are no synergies (they would be called out if expected).

Personally I take little comfort from the fact we have management / directors with an enviable long term track record of growing shareholder wealth, and who are participating in the equity raising. I've learned that large unsuccessful forays into overseas ventures can be undertaken just as easily by astute owner managers as they can be by poor managers with no shareholding. I'll never forget the Flight Centre acquisition of Liberty Travel in the US over a decade ago at 7 x EBITDA. Despite FLT being a superbly led company, many years later FLT conceded they had overpaid and the writedowns followed.

I think it is important to bear in mind that prior to this announcement Reece was trading on a similar EBITDA multiple to the one being paid for Morsco. I would have thought our company should be paying less for a business that has much lower margins and is engaged in more competitive markets (albeit possibly stronger growing markets).

I'm treating this 'transformation' as an IPO because the overall business of Reece has now changed significantly. As such I need to adjust my asset allocation according to the new risk / reward scenario now underway. Ive trimmed my position accordingly. (just as investors are scrambling for the stock, I'm clearly misguided!)

Anyone else have any thoughts on shareholder value, be appreciated.

Expand

Thanks @neoteric, for the very informative post. I have admired REH for years now and have always hoped for a hiccup to present a buying opportunity - it has never happened.

Seems like an unusual acquisition for such a prudent management team. Wishing all holders the best, but I will be watching this one from the sidelines.

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(20min delay)
Last $23.87		Change 0.150(0.63%)		Mkt cap ! $18.39B

Open	High	Low	Value	Volume
$24.09	$24.28	$23.83	$1.422M	58.59K

Thanks @neoteric, for the very informative post. I have admired...

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