On Friday G8 Education launched a hostile takeover bid for its smaller rival Affinity Education in a deal that would see G8 exchange one of its shares for every 4.61 shares in Affinity, valuing the company at $162m or 70c per Affinity share. The bid seems generally positive for bondholders being largely equity funded and in line with its corporate takeover policy at an estimated 4.6x forecast underlying annualised EBITDA
Seizing upon a 16% earnings downgrade issued by Affinity and the subsequent 34% fall in its share price, G8 acquired 16.41% of the company on 2 July (for $0.70) and launched the hostile scrip bid the next day. On 3 July G8 acquired further shares taking its holding to 19.89%.
It has been reported that the offer on Friday was not the first time that the company had approached Affinity over a possible takeover or merger. It is understood the two companies met in late April to discuss terms of a nil premium merger but a disagreement on price saw Affinity walk away. The companies again met in June but Affinity again walked away after receiving a bid that was lower than the April offer and believed to be around 80c per share. It is understood the negotiations broke down after Affinity deemed the 80c offer would undervalue its shares.
The share purchase and the April and June merger meetings will now form the basis of a legal letter to ASIC arguing that G8 should have disclosed its merger talks before upping its stake in Affinity. Affinity has brought on Luminis Partners and Corrs Chambers Westgarth to advise the company while the hostile takeover process continues. G8 expects to lodge a bidder’s statement with ASIC within the next 21 days.
Items to note:
- Enterprise Value of Affinity is $197m ($162m of equity plus $35m of debt)
- The scrip offer ensures the balance sheet remains strong as it is mostly equity funded
- Forecast FY15 EBITDA (mid-range) is $29.5m so paying around 6.7x FY15 EBITDA ($197m/$29.5m)
- 2H15 EBITDA (mid-range) is $21.5m (1H15: $8m) due to acquisitions. Annualising this figure ($43m) G8 is offering to pay around 4.6x estimated underlying forecast EBITDA
- G8 is paying above centre acquisition target of 4xEBITDA but is in line with stated “exception” rule when they do corporate takeovers
- Although G8’s proposed scrip-based bid for Affinity represents a divergence from the self-funded growth strategy, there appears strategic merit in taking out another listed player at a reasonable multiple
- The deal would expand G8’s portfolio by 161 centres to circa 626 by CY15 end and lift its market share by 2.5% to circa 10%
- Affinity’s disappointing operating track record suggests upside potential for G8 with respect to margin improvement and divestment of underperforming assets
- UBS believes G8 could achieve synergies of $5-10m and the transaction could be 10-13% accretive