Equiniti (EQN.L) – Rumored Takeover – 22% Upside

Current Price: £1.39

Offer Price:  £1.70

Upside: 22%

Expected Closing Date: TBD

This idea was shared by Lucas.

 

This is a short note on a potentially interesting takeover. The situation is still in a rumors stage.

On the 8th of February, Sky News reported that share registry services provider Equiniti has received a takeover offer from a tech-focused PE firm Siris Capital at £1.70/share. The report stated that Siris has tried to approach EQN several more times last year, with the initial interest dating back to pre-Covid times. The article also notes that a certain shareholder believes that the offered premium is sufficient for EQN to engage with the buyer.

One shareholder pointed out that the latest proposal had been pitched at a level about 40% higher than the current share price - a premium that would ordinarily be sufficient to secure access to a company's books.

As a result, EQN share price spiked to £1.76/share and then settled back to current levels, leaving 20%+ spread to the rumored acquisition price.

The weirdest aspect in this situation (and probably largely responsible for the spread) is that in 3 weeks so far, EQN has not made any comments regarding the rumors/offer, even though based on UK Takeovers Law the company was supposed to make at least some kind of announcement, even if the rumors were not true (Rule 2.2):

(c) when, following an approach by or on behalf of a potential offeror to the board of the offeree company, the offeree company is the subject of rumor and speculation or there is an untoward movement in its share price;

The 'untoward movement' point above is decided by the Takeovers Panel, which the company must consult with if the price moves by at least 10% (the panel then decides if the announcement should be made or not). In this case, the movement was 52% (reached £1.76/share) - so some kind of announcement was expected. However, my experience with UK Takeovers Law is limited, so it would be interesting to hear some more educated comments regarding this.

The worst-case scenario is obviously if the case of no takeover - EQN doesn't make any announcements, the whole situation goes silent or it turns out that the rumors were false. In this case share price is likely to drop to pre-announcement levels of £1.16/share or 16% downside from current levels. However, if EQN eventually acknowledges the offer or even opens the books to the buyer, this should act as a positive catalyst.

The situation is still very speculative, but there are several points that make it interesting:

  • The timing is opportunistic and it's quite possible that at the consideration price EQN is an interesting target for PE firms (i.e. the rumors about the ongoing discussions are true). The offer comes at EV/underlying EBITDA'19 multiple of 7.2x vs 9x+ average multiple since EQN IPO in 2015 and vs 13x multiple of its much larger Australian peer Computershare. 170p/share price also marks a 23% discount to EQN's pre-COVID prices.
  • Last year, EQN was hit by the Covid outbreak, and in April'20 EQN suspended the dividend payment, which likely also contributed to the share price deterioration. However, the core share registry business of the company is holding up strong - 75% of EQN revenues are recurring and are secured by long-term contracts with the major UK companies. The company has half of FTSE 100 companies as its clients, so this major part of the revenues is likely going to remain stable. Two of the most impacted segments (around 30% of revenues) include EQ Digital (various back-office services) and Interest Income (see more below). EQ Digital revenues are mostly project-based and heavily depend on the corporate activity and dividend/share dealing programs of EQN clients (which largely got suspended/delayed/slowed down after the COVID-outbreak). Interest Income revenues depend on the general interest rate environment in the UK and US, and after the COVID outbreak, rates received a significant haircut. Overall, the whole point is that while the core business is holding strong, the majority of the remaining business should recover eventually in the post-COVID environment as the corporate activity and dividend payments by EQN clients normalize. Regarding the interest rates - it is difficult to predict anything here, however, the segment is relatively small (3% revenues, 10% EBITDA) and with the current set up this acts mostly as a free option for any further positive increases in the interest rate.
  • Risk reward is slightly skewed to the positive side - the potential upside of 22% vs 16% downside to pre-announcement prices. The actual downside is likely to be lower given the potential EQN recovery after COVID and likely eventual reinstatement of the dividends (which could take a bit longer).
  • The company might now be more vulnerable to a takeover given the upcoming CEO change from the 1st of April 2021 (as the current CEO Guy Wakeley apparently did not manage to reach an agreement with prospective buyers). On the other hand, the new CEO might want to prove himself first and might not be willing to let go of the company. So management change might actually push the takeover chances to both sides.
  • Also, CEO change is also positive for the share price recovery, given the poor reputation of the previous management due to their continuous guidance underperformance and prolonged/pricy integration of the US segment acquisition in 2018. Moreover, EQN seems to be in a sort of a turnaround and recently has been selling its lackluster subsidiaries.
  • Worth noting that the previous rumor from Sky News regarding the upcoming EQN subsidiary sale turned out to be correct (the rumored price was precisely as reported as well).

 

EQN

The company handles share registrar and other investor-relations-related back-office services for large UK businesses. The reported segments include:

  • EQ Boardroom (27% revenues'19, 37% underlying EBITDA'19) - share registration services to around half of the FTSE 100 companies. The division also provides tax and employee share scheme administration, share dealing, wealth management services. 80% of the revenues are recurring.
  • EQ Digital (31% revenues, 32% underlying EBITDA) - enterprise workflow for the case and complaints management, credit services, on-boarding new clients, and specialist resource for rectification and remediation. Recurring revenues - 40%.
  • Pension Solutions (23% revenues, 14% underlying EBITDA) - administration and payment services to pension schemes. Recurring revenues - 80%.
  • Interest Income (2.5% revenues, 10% underlying EBITDA) - income as a fee for the administration of certain client and customer balances.
  • EQ US (17% revenues, 17% underlying EBITDA) - share registry services for US market. Recurring revenues - 70%.

Presentation of the recent interim results.

2 COMMENTS

  1. Alex

    Thank you for sharing. It is certainly an interesting case. The debt of the company looks quite high at 355.3, which makes it difficult for a PE firm to put additional debt on the company. However, it’s probably no coincidence that the rumors about a possible takeover have been leaked. This puts additional pressure on the management team to engage with the buyer. I am just wondering why management is refusing to comment on this. Do you have any idea?

    1
  2. Ilja

    It looks like the rumors were correct. On the 19th of April, Siris officially announced a non-binding offer for EQN at £1.70/share in cash.
    https://wp.siris.com/wp-content/uploads/2021/04/Rule-2.4-Announcement.pdf

    The proposal is subject to a number of pre-conditions, including detailed due diligence and arrangement of debt financing. PUSU date is the 17th of May.

    EQN has advised no action and will evaluate the proposal. Target’s announcement also noted an ongoing strategic review by the new CEO:

    In addition, as previously announced, Paul Lynam has been appointed as Chief Executive of EQ with effect from 1 April 2021. Paul has initiated a thorough strategic review of the business and will announce the conclusions of this review no later than 29 July 2021, the proposed date of EQ’s 2021 interim results.

    https://www.londonstockexchange.com/news-article/EQN/response-to-statement-by-siris-capital-group-llc/14942650

    5.5% upside remains.

    Given the way this has developed so far, it seems to me that EQN and the new CEO have no intentions to proceed with the takeover. If the rumors are correct, Siris has approached the board numerous times already, while the recent £1.70/share offer has been basically ignored for almost 3 months until Siris announced it publicly themselves. The fact that EQN has recently changed CEOs and the way it mentioned the strategic review in the response also speaks against EQN accepting the offer. On the other hand, Siris is clearly very interested in EQN, however, they are not rushing to increase the price, and it is difficult to say how long they will persist if the board rejects the DD.

    Overall, I think it is time to close this idea with 15.5% in less than 2 months.

    4

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