Carclo Share Discussion Threads

[thechurch333] 06/7/2018 17:49

I looked at the shareholder declarations against what I think is a reliable source for holdings data prior to the approach. As per my post of yesterday, I think Aberforth have added, Hendersons have reduced, Schroders added a tiny amount. Apologies if I've got this wrong.

[1gw] 06/7/2018 17:21

State of play at end of week 1.

By my reckoning, at the end of the first week we have had opening position declarations from shareholders holding 76% of Consort's shares and 50% of Carclo's shares.

But I haven't noticed a single change reported - i.e. no-one (apart from the intermediaries with their 8.5's) has owned up to buying or selling either offeror or offeree since the process started.

Is that a liquidity issue, or a lack of interest issue or an insufficient information issue?

[1gw] 06/7/2018 15:36

That's another chunk for me. Getting more and more convinced. But many a slip...

DYOR.

[queeny2] 06/7/2018 15:23

Listen to church. :)

[thechurch333] 06/7/2018 14:58

It would clearly be simpler for Carclo to conduct one auction than two, but both businesses are very saleable to trade buyers. Most likely would be a sale of one of the businesses(and possibly Aerospace) and a corporate takeover for the rest. They will obviously know who the likely buyers are and will hopefully have already been in contact. They should have a plan to defend a hostile takeover bid. I just hope they don't go down the route of "Consort are trying to buy the company on the cheap, but please stick with us because we can do a much better job". As somebody else rightly said, Carclo don't seem to have a lot of support from their own shareholders, given the low valuation/share price pre-bid.
Consort have been planning this for a while. They have chosen their timing carefully and are several steps ahead. Carclo do need to catch up fast. Consort may go for the kill sooner rather than later as they will lose this advantage at some point.

[1gw] 06/7/2018 14:44

Carclo does have the option of arranging 2 auctions perhaps. Try to take LED off the table with Consort and set up a formal sale process for LED, while opening discussions with Consort to see if they can get to agreement on a recommended offer for CTP (and presumably aerospace). In parallel drum up interest in either a formal sale process on CTP, or try to persuade someone to come in with a competing offer if they end up announcing a recommended deal with Consort on CTP. They might have a bit of an issue with the pension fund in that scenario of course - having to split the liabilities between 2 companies.

[1gw] 06/7/2018 14:39

Consort may not be a darling of the PIs, but it has a pretty impressive shareprice chart from 2010 onwards and a good strong institutional base. Boring but profitable by the look of it. There doesn't seem to be much liquidity there either, hardly any trades going through - certainly not obvious that any of the existing Consort shareholders are playing the arb as yet.

I agree Carclo needs to get an auction going to achieve the dreamier end of the price range. And the first deadline isn't so far away - 30th July (about 3 weeks) when Consort has to put up or shut up [edit: actually "to either announce a firm intention to make an offer for Carclo….or announce that it does not intend to make an offer for Carclo…"]. That doesn't leave a lot of time for a company starting from scratch to go through internal processes to get a bid approved.

So I would have thought the winning way would be to try to get a credible stalking horse out in the open (if that isn't mixing metaphors) in the form of a firm bid from Consort by 30th July, which could then underpin an auction process should a competing offer come in. The big question for me is whether that is going to need a recommended deal - i.e. how confident do Carclo and their advisors feel that Consort will table a bid if it is not on a recommended basis? And if Carclo feel they need to go the recommended route, how high does that initial price have to be for them to feel they haven't sold shareholders short if a competing offer doesn't arrive? Because once they recommend the bid, it will be difficult to withdraw that recommendation if a competing offer doesn't arrive. And they will presumably be prevented from soliciting an offer from another company as well at that point. So they have to do the work between now and recommending an offer (if that's where they end up) so that if they get to a recommended offer, there is a reasonable chance of a counter-offer.

It's not going to be a restful summer for the Carclo executive team.

[queeny2] 06/7/2018 14:30

Church, that it's two businesses with zero overlap in any way is a potential problem for really getting an auction going. So much simpler without that.

[queeny2] 06/7/2018 14:26

Listen to church. He's good.

[heeley3] 06/7/2018 14:23

I note, with interest, that there is NO activity on the Consort thread (CSRT). Not sure what to make of that - it certainly is not a darling of any PIs!

[thechurch333] 06/7/2018 14:19

There will be a lot of shared costs in the CTP business that Consort will be able to take out - distribution, sales team, central functions etc. It will also provide Consort with an infrastructure to enter new geographic markets - so significant revenue synergies also. It reminds me a bit of when Reckitts bought SSL - the headline multiple looked high, but the synergies were massive, enough to broadly double SSL's profits.
The key to getting a good price, however, is to get an auction going. I'm sure there are other companies out there who would be able to extract similar synergies to Consort - they just need to be persuaded to get involved. If so, we could all be surprised how much this goes for!

[queeny2] 06/7/2018 13:09

1g and church:

so i did some crude very crude numbers.

Debt £30

but pension fund deficit also £30m, being worked off at £2m a year extra contributions (Consort have identical situation in their pension fund)

CTP sales £90
'Underlying' operating profit £6.7 (a poor year, prior was £8.7m)
target margins, never attained, 10%

LED sales £50
'Underlying' operating profit £6.4
it's a good business, not to be sniffed at,
cagr over four years of sales 14%
cagr of underlying profit 12%

aerospace winding down, sales £6m, operating profit £750k

aggregate sales £146m

(central costs £3m, which would all/mostly vanish)

If you put the whole shooting match on 1x sales you get to £146m EV, ignoring pension fund (can we can we can we that's a question) that's £116m equity, divide by 73m shares that's 158p.

Every 0.25x extra sales gets you 0.25 x £146 = £36.5m = 50p on the share price.

As far as I can find out, low tech medtech which is what CTP is, should go out at min 1.5x sales.

I IMAGINE there should be a trade buyer of LED, nice margins, at around the same??

DYOR DYOmath

[queeny2] 06/7/2018 13:03

I added too

[1gw] 06/7/2018 09:54

I've made up my mind and bought some more just now. Risk reward looks good to me. Thanks for the discussion.

[thechurch333] 06/7/2018 09:47

Reasonable thought, but not a significant concern. The combined entity will still be a small player in a fragmented market up against much larger customers and suppliers. I don’t think there is much direct product overlap. Worst case would be small specific product disposals, but not enough to derail any deal.

[queeny2] 06/7/2018 09:08

Utterly. But good precautionary thought. Global market tiny market share etc etc.

[pldazzle] 05/7/2018 22:55

There are a number of thoughtful and intelligent posters on this board: respect all round. But I don't think anyone has raised the spectre of a Concord/CAR deal being referred to the CMA [Competition and Markets Authority]: may I take it that you're all relaxed about that?

[queeny2] 05/7/2018 19:31

Agree with you both. The third profit warning I've been waiting for has been more or less cleansed by the recent results I hope, so agree low % probability. But in sizing my position the only basis I know is to think how much I'm prepared to lose if it goes wrong. But it's low probability. Everything about Consort's behaviour is just right, very aggressive, loaded up with advisers, the works.The major wrinkle is LED. They can't want it, but that they're prepared to hostile bearhug even with led there shows how much they want CTP.

[thechurch333] 05/7/2018 19:09

80p in a no deal scenario is too pessimistic. At the very least management will be forced to adopt a more value enhancing strategy and Consort would still be there in the background.

The downside scenario for me is a significant profits warning and Consort lose interest - but this is a very low probability (<5%).

Consort REALLY want this. Even if they pay a high price the revenue synergies and cost savings will easily outweigh the multiple they pay. There is downside for them if they don't win it as it will raise question marks about their strategy/organic growth prospects. They will obviously present this to their shareholders as an opportunistic move, but not all will buy that.

The key for Carclo is to get other parties interested so they can get an auction going. I am optimistic other parties will be interested and will get involved. Carclo have two good businesses making decent returns and with good growth in prospect from recent contract wins. There will be a trade buyer for the LED business who will be able to extract synergies not available to Consort. This is Carclo's strongest card to play.

If it comes down to a choice between management teams in an all share offer I don't think it will take much of a bump from Consort to get it. This wouldn't be all bad news as Consort shares would probably go up and Carclo shareholders would share in the upside. That's Consort's pitch to Carclo shareholders.

Sorry, a bit of a ramble. Risk/reward still looks good to me.

[1gw] 05/7/2018 18:26

Probabilistic is good! So on those numbers you're at fair value being £1 plus 20% of the dream. If you currently dream of £1.80 that would give you £1.36 fair value, well over the current price.

My £1.50 was much more of a deterministic outcome, and very much back of the envelope as you could see. If there's some half-decent pushback from Carclo and its shareholders plus Consort really want it but don't want a dilutive acquisition, then they could reasonably offer £1.50 (with still a bit in reserve). That fits with the SOTP valuation someone mentioned I think and as a 30%-ish premium to their opening shot, also makes sense from that angle.

Not really a lot of volume in Carclo today, and hardly any in Consort. No new 8.3's today, that I've noticed, just Carclo's own OPDs in itself and Consort.

It strikes me that with Consort's shareholder base (25 companies accounting for nearly 70% already declared according to my spreadsheet) there's plenty of scope for arbitrage if some of them think fair value is materially above today's price. i.e. sell down their Consort position and buy Carclo with the proceeds, as opposed to just shorting Consort.

So if volume picks up and we see Consort shareholders selling down and acquiring Carclo, that will be a good indication that they see value (in Carclo) at that price.

[queeny2] 05/7/2018 17:58

1gw, just trying to get a handle on what CSRT could/would pay up to if they had to. Even if having to is only a 20% chance I like to factor it in.

I have no idea where this will end up, but I try and work out some different paths and then assign them probabilities to get a blended outcome.

So no deal (back to 80p) might be 20%, weak fold (130p) 30%, OK fold (150p) 30%, excellent outcome (dreamy) 20%. As it were.

And those probs are influenced both by how much CSRT want it and what defence CAR can mount, so it's all a bit circular but there you go.

[1gw] 05/7/2018 12:57

Agree on the central costs, but simplistically that is what would allow them to present it to their own board as accretive. They pay a standalone earnings multiple that matches their own but then take costs out to create the accretion.

Sounds like you're heading in the direction of them paying full value (including synergies) plus a strategic premium?

[queeny2] 05/7/2018 12:45

boadicea, I'm afraid Car is dead in the water precisely because it is so cheap, for cheap read wholly unloved by the market. It is certainly unloved by its existing shareholders because unless I mistake the shares this year have been at a ten year low.

1gw - agree re LED, they need to get it at a price they can shift it on at, they surely don't want it. Some multiple of sales, which is what the next (synergistic) acquirer will look at, or EBITDA if PE.

But re CTP I'd take a sales multiple NOT a p/e or an EBIT multiple, as that will include the synergies and margins Consort will think they can get. Then work towards a total EV and knock off the debt. I'm still working on my version, I can see value above 150.

Doing it your way you leave the £3m of central unallocated costs in there, for example, which will all/most vanish.

This is a really big deal for Bespak, sales £130m, to nearly double by adding CAR's £90m sales. Fairly transformational, they want this.

Round numbers Consort has £300m sales total, and MCap of £600m + £100m debt, so EV/sales 2.3x

[thechurch333] 05/7/2018 12:25

I'm sure they are working hard on both!

Hopefully they have some contingency planning already in place.