Redde (REDD.L) – Merger Arbitrage – 5% Upside

Current Price: £1.07

Merger Consideration: £1.13

Upside: 5%

Expiration Date: Q1 '20

 

This is a standard all-share merger of equals in UK.

Redde (REDD) - accident management, legal and complaint-handling services provider is merging with commercial vehicle renting company Northgate (NTG). NTG will control 54% and REDD 46% of the combined company. The acquisition aims to create one platform for mobility services and sees many cross selling opportunities (presentation). The consideration stands at 0.3669 NTG shares for 1 REDD. Borrow is available cheaply (0.58%) on IB, so given the quick expected closing time (Q1 '20 according to the agreement) the transaction still offers considerable IRR.

Conditions include majority shareholder approvals of NTG shareholders, 75% of REDD shareholders participating and majority of them voting for the transaction. Regulatory approval is unlikely to be an issue. Both shareholder meetings are set for the 15th of January. The main risk seems to be the approval of REDD shareholders.

Below are some additional points and thoughts on the companies and shareholder bases.

 

Northgate

  • The company is getting its revenues from two sources - light commercial vehicle renting (69%) and selling (31%). It operates in UK (65% of revenues) and Spain (35% of revenues, but significantly better margins).
  • NTG is undergoing difficult times. In March '19 its chairman was ousted by the second largest shareholder Crystal Amber (7%) and now at the day of the of the acquisition announcement, the company stated that its CEO is resigning immediately and the combined company will be led by REDD CEO. The explanation for such a sudden resignation was not provided.
  • Its interesting that in March '19 Crystal Amber wanted to replace the previous chairman with their own nominee, but after the chairman resigned, the shareholder has withdrawn it's claim. At the moment it seems that Crystal Amber does not have any direct control of the board, so its not clear if they have participated in the initiation of this merger with Redde. Nonetheless, the fact that they've remained silent about it so far might suggest that they are not against it.
  • It is also interesting that Crystal Amber is backed by Woodford Investment Management, which currently holds 20% in REDD (see below). At the time of CEO ousting Woodford owned 16% of Crystal, but now has cut the stake to less than 5%.
  • Its not like the financial performance of the company is extremely bad. It is pressured by lackluster car sales segment (25% of rev.), which fell off -20% in the latest interim report (Nov '19) and -16% in the annual (June'19). However, its main segment, vehicle renting, is growing (+2.5% interim) and the margins are stable (+0.3% interim). Nonetheless, from the Crystal Amber letters last year it seems that shareholders are tired from the under-performance of the company (the share price of the company has fallen by 50% in the last 5 years) and lack of competence from the management.
  • I think all of this might play well into shareholders being ok with handing over the reels to REDD CEO, whose track record is quite appealing.
  • Major shareholders:
    NTG shareholders

Redde

  • Redde operates only in UK and provides auto-related services (29% of revenues) like accident management, vehicle replacement, repair management and insurance claim handling services (71%).
  • During the last several years company showed consistently strong revenue and profitability growth. Redde considerably outperformed the market index in the last 5 years as well.
  • However in Feb '19 the company has lost a large customer , which caused the stock to drop over 40%. The effect will be felt in the current fiscal year ( to June '20) - 19% decrease in revenues and 11% drop in adjusted operating profits are expected.
  • Shareholder base is quite concentrated. 66% is held by top 5 holders.Annotation 2020-01-08 200655

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