A UK-listed company announces the simultaneous sale of two of its divisions. After paying out >70% of the market cap in cash we can buy the remainco for less than half of what comparables usually trade at in this solid risk/reward idea.
Excellent writeup, as usual. I took a position. Some notes I had:
1) The company is guiding net debt after the transaction to 100M vs the 55M you estimated. From the M&A call: "As you've just seen from Slide 6 of the deck, we're having net debt repayment of about GBP 150 million. And therefore, we would expect the pro forma to be of order. And bear in mind, we're going quite some time into the future into Q1 of next year. But we do expect the pro forma to be around GBP 100 million of net debt."
2) While the company guided to 13M of corporate costs sticking with events, they clarified on the call that that doesn't include share-based comp which would be about 5M annually: "So the answer is the GBP 13 million does not include share-based compensation. Given that the Events business will be substantially smaller than Ascential and just in terms of number of heads, yes, the vast majority of that share-based payments charge will go with the disposal of businesses, both WGSN and Digital Commerce. And what we would expect is of order GBP 5 million-ish, something like that as our annualized share-based payments charge going forwards. So if you want to have a total, including share-based payments, you would take the GBP 13 million and then you would add GBP 5 million."
3) I've been worried about the Hudson MX value given this isn't the best market for unprofitable ad-tech startups, but I became more optimistic after some quotes on the call: "So in relation to the Digital Commerce sale, Omnicom were very clear that their offer was for the Digital Commerce business. But through the process of that exercise, it also clearly raised their significant interest in Hudson. But they recognized that should there be a process for that transaction or that business, which clearly, we were in the position to sell Digital Commerce. We were not in a position to sell Hudson. The right to sell Hudson is the majority owner of the company, which isn't us. But actually, through the end of this exercise, I think it would be fair for you to conclude that for a very financially savvy owner, for them to conclude to enter into a sales process would tend to suggest that there is a fair degree of interest."
Catapult, thanks for the kind words and for the detailed feedback. These are great points.
- On the debt, I did read those comments, but given the potential that the cash would offset the pro-forma EV, I decided to ignore it.
- Good point on SBC. Best to net it out or build in some dilution.
- Yeah, Hudson MX is a question mark, but what's interesting is that the CEO wants to buy it. Maybe this is reading too much into it, but since he was likely responsible for the acquisition in the first place, he would likely want to pay up for it. Otherwise, if ASCL took a loss on it, it would likely reflect poorly on his track record. That's my thinking on it, but could be wrong.
Appreciate another great idea from CSC! I noted the capital distribution is expected to be a "special dividend" rather than a "return of capital" which may open us up to a large taxable event. Maybe I missed something. Thoughts?
It's not 100% clear whether this will constitute a return of capital event rather than a regular special dividend. I did not want to comment specifically on the taxability of the dividend given the mix of US/non-US readers and as everyone will have different tax consequences. One alternative is to hold the shares up until they pay out the dividend. Or to invest in this through a tax-sheltered account (IRA, etc). Thanks for the comments!
I may be wrong, but I believe that returns of capital are a subset of special dividends, so the language from the company doesn't actually tell us how the dividend is classified.
Supposing the dividend is taxable, you will also get a capital loss from the fall in the share price post-dividend. Since the short-term capital gains rate is higher than the qualified dividend rate, we might actually prefer a taxable dividend as it potentially creates a tax arb (note, I am not certain this would be a qualified dividend but it looks like it would be). You would just want to realize the loss before it becomes long-term and in the same tax year as the dividend is paid. You would also need ST capital gains to offset.
I asked IR and they said they are still working on the "precise mechanism" in which the cash will be returned (this leaves open the possibility that it's a return of capital). There will be more on this when they release the Circular in a few weeks.
Thanks for reaching out to IR. I think the tax accounting for the classification is fairly complicated, so it makes sense that they don't know yet.
I just wanted to add that it is better not to buy in an IRA if you think there is a risk the dividend might be taxable. The US-Aus tax treaty specifies a withholding tax on dividends which is a deadweight loss in an IRA.
Oops. Sorry, I was reading your other writeup at hte same time (WCG) and I got confused! There is no WHT in US-UK treaty. So buying in an IRA is fine (although you'll lose out on the arb)
Yes and should be accretive at this price also. Tbh i would prefer to get the tax arb but realistically wasn't counting on it as I would expect the company to do whatever is most favorable for LT holders. And overall it's a good thing that they are proactively doing so by considering a tender.
Excellent writeup, as usual. I took a position. Some notes I had:
1) The company is guiding net debt after the transaction to 100M vs the 55M you estimated. From the M&A call: "As you've just seen from Slide 6 of the deck, we're having net debt repayment of about GBP 150 million. And therefore, we would expect the pro forma to be of order. And bear in mind, we're going quite some time into the future into Q1 of next year. But we do expect the pro forma to be around GBP 100 million of net debt."
2) While the company guided to 13M of corporate costs sticking with events, they clarified on the call that that doesn't include share-based comp which would be about 5M annually: "So the answer is the GBP 13 million does not include share-based compensation. Given that the Events business will be substantially smaller than Ascential and just in terms of number of heads, yes, the vast majority of that share-based payments charge will go with the disposal of businesses, both WGSN and Digital Commerce. And what we would expect is of order GBP 5 million-ish, something like that as our annualized share-based payments charge going forwards. So if you want to have a total, including share-based payments, you would take the GBP 13 million and then you would add GBP 5 million."
3) I've been worried about the Hudson MX value given this isn't the best market for unprofitable ad-tech startups, but I became more optimistic after some quotes on the call: "So in relation to the Digital Commerce sale, Omnicom were very clear that their offer was for the Digital Commerce business. But through the process of that exercise, it also clearly raised their significant interest in Hudson. But they recognized that should there be a process for that transaction or that business, which clearly, we were in the position to sell Digital Commerce. We were not in a position to sell Hudson. The right to sell Hudson is the majority owner of the company, which isn't us. But actually, through the end of this exercise, I think it would be fair for you to conclude that for a very financially savvy owner, for them to conclude to enter into a sales process would tend to suggest that there is a fair degree of interest."
Catapult, thanks for the kind words and for the detailed feedback. These are great points.
- On the debt, I did read those comments, but given the potential that the cash would offset the pro-forma EV, I decided to ignore it.
- Good point on SBC. Best to net it out or build in some dilution.
- Yeah, Hudson MX is a question mark, but what's interesting is that the CEO wants to buy it. Maybe this is reading too much into it, but since he was likely responsible for the acquisition in the first place, he would likely want to pay up for it. Otherwise, if ASCL took a loss on it, it would likely reflect poorly on his track record. That's my thinking on it, but could be wrong.
Thanks again for the thoughts - I appreciate it!
Appreciate another great idea from CSC! I noted the capital distribution is expected to be a "special dividend" rather than a "return of capital" which may open us up to a large taxable event. Maybe I missed something. Thoughts?
Thanks, Tim! Appreciate that.
It's not 100% clear whether this will constitute a return of capital event rather than a regular special dividend. I did not want to comment specifically on the taxability of the dividend given the mix of US/non-US readers and as everyone will have different tax consequences. One alternative is to hold the shares up until they pay out the dividend. Or to invest in this through a tax-sheltered account (IRA, etc). Thanks for the comments!
I may be wrong, but I believe that returns of capital are a subset of special dividends, so the language from the company doesn't actually tell us how the dividend is classified.
Supposing the dividend is taxable, you will also get a capital loss from the fall in the share price post-dividend. Since the short-term capital gains rate is higher than the qualified dividend rate, we might actually prefer a taxable dividend as it potentially creates a tax arb (note, I am not certain this would be a qualified dividend but it looks like it would be). You would just want to realize the loss before it becomes long-term and in the same tax year as the dividend is paid. You would also need ST capital gains to offset.
I asked IR and they said they are still working on the "precise mechanism" in which the cash will be returned (this leaves open the possibility that it's a return of capital). There will be more on this when they release the Circular in a few weeks.
Thanks for reaching out to IR. I think the tax accounting for the classification is fairly complicated, so it makes sense that they don't know yet.
I just wanted to add that it is better not to buy in an IRA if you think there is a risk the dividend might be taxable. The US-Aus tax treaty specifies a withholding tax on dividends which is a deadweight loss in an IRA.
US-UK?
Makes sense, thanks for the thoughtful commentary!
Oops. Sorry, I was reading your other writeup at hte same time (WCG) and I got confused! There is no WHT in US-UK treaty. So buying in an IRA is fine (although you'll lose out on the arb)
The circular raises the possibility of a tender offer in lieu of (or in combination with) a special dividend.
"Following consideration of the recent trading in Ascential shares and
shareholder feedback received to date, the Board is considering implementing the return of
value by way of a special dividend, or a tender offer, or a combination thereof. The Board
continues to retain discretion around the form, timing and quantum of the return at this stage in
order to maintain maximum flexibility. The form of return is expected to be determined taking
into account several factors including the Ascential share price and the implied look-through
valuation of the Events business following approval and completion of the Sales, efficiency and
shareholder feedback. Whichever form of return is selected, the Board also retains the ability
to execute a share buy back in line with existing authorities established at Ascential’s last AGM."
Thanks for the info! Looks like that might benefit US holders that don't want to deal with the potential tax issue.
Yes and should be accretive at this price also. Tbh i would prefer to get the tax arb but realistically wasn't counting on it as I would expect the company to do whatever is most favorable for LT holders. And overall it's a good thing that they are proactively doing so by considering a tender.