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.

• 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.