Hunters Property (HUNT.L) – Merger Arbitrage – 16% Upside

Current Price: £0.67

Offer Price: £0.78

Upside: 16%

Expected Closing: March 2021

Scheme document

This is a merger between two property agency franchisors in UK. Liquidity is extremely low, however, some members might find it interesting nonetheless.

The Property Franchise Group (TPFG.L) is acquiring Hunters Property (HUNT.L) for 0.1655 TPFG shares + £0.432 in cash. Additionally, HUNT shareholders will receive a special dividend of £0.027/share with the record date being set for the 5th of March (payable on the 12th of March). The total upside here amounts to 16%. The merger is expected to close in March

The strategic rationale is very clear and strong – two peer companies with complementary businesses are looking to increase scale and geographic reach and profit on the synergies/earnings accretion. The initial consideration (£0.72/share) came at a 4% discount to the last closing price of HUNT. However, the acquisition price seems quite fair when compared to TPFG or another peer BLV.L.

Conditions include approval from HUNT and TPFG shareholders. HUNT directors and major shareholders, holding 71.1% of total shares have agreed to vote in favor. TPFG directors owning 32.2% shares are also supporting the merger. Given the already received support shareholder approvals on both sides should not be an issue. HUNT shareholders’ meeting is set for the 5th of March, while it is stated that TPFG meeting should come in before that. This merger is likely to close as scheduled and I do not think 16% spread is indicative of elevated risks.

The main reasons for a relatively large spread are very low trading liquidity as well as lack of borrow for hedging. Only around £10k worth of HUNT shares changed hands in the last two weeks. However, with a bit of time/patience it should be possible to build a small position. As for lack of borrow, the property market in UK has recovered substantially (HUNT.L, TPGF.L, BLV.L stock prices are around/above pre-COVID levels) and full year results are expected to be in line with the pre-COVID expectations. Thus, the downside should be well protected by the existing spread and TPFG price. Even if for some reason TPFG falls to the lowest levels reached during of the COVID-19 outbreak, which is £1.45/share, the merger consideration would still amount to the current HUNT share price of £0.67.

The cash portion of the consideration will be financed by the available loan facility from Barclays and existing cash resources.

Peer Comparison

HUNT

The Hunters Group is a franchised estate agency group, which has 209 branches (90%+ are franchised) and claims to be the largest franchised sales and lettings agency brand in the UK.

The business saw only a temporal impact from the pandemic – sales activity fell 93% in April, however, the recovery started quickly and sales started increasing in June, while in August the activity was up 38% YoY.

Interim results showed revenues falling -18% YoY, however, due to cost-cutting measures adj. EBITDA was +30% YoY, adj. profit before tax +44% YoY and EPS +33% YoY. Interim dividend was suspended.

CEO stated:

we have commenced the second half very positively, with activity levels returning to (and in some areas exceeding) pre-Covid levels and a lower and more resilient cost base.

TPFG

The group is a UK-based property franchise business. It has nearly 250 branches (all franchised), manages 58k properties for rent, and sells around 11k properties (2019).

Interim results reflected a similar trend to that of HUNT.L – revenues and adj. profit before tax was in line with the previous year, adj. EBITDA +4% YoY. A stronger balance sheet compared to HUNT.L (net cash position) also allowed TPFG to quickly reinstate dividends.

CEO stated:

Current trading has shown good momentum and the Board currently expects results for the full year to be in line with its pre-Covid expectations for the full year.