Cambria Automobiles (CAMB.L) – Expected Better Offer – Upside TBD

Current Price: £0.75

Offer Price: £0.80 (higher offer is expected)

Upside: 7%

Expected Closing: Q3 2021

Press release

This idea was shared by Olivier.

 

*Important* - the situation has developed substantially and the write-up below now acts mostly as a background to the current thesis. To see an updated thesis in the comment here.

 

The stock trades on the London AIM exchange and part of the upside results from wide bid/ask spread.

On the 22nd of March, Cambria announced a possible acquisition of all outstanding shares at a price of £0.80/share in cash by the CEO, CFO, and a managing director (who own a combined 40%+ of CAMB). A firm intention to take the company private is expected by the 19th of April. After that, I see a customary 2-3 month closing period for this acquisition, delivering a decent IRR if you can buy shares of this company anywhere around or below £0.75/share price. Do keep in mind that the UK charges a 0.5% Stamp Duty Reserve Tax on the purchase of shares in your calculation of the IRR.

This situation offers a spread of 7% (potentially smaller/larger due to wide bid/ask spread) with a 3 to 4-month timeframe resulting in annualized IRR of 25%. The downside is protected both in the short- and longer-term if the deal fails. Before the possible deal announcement, Cambria was trading around £0.65/share and I assume the shares will go back to this level in a no-deal scenario. From the longer-term perspective, CAMB is cheap on current earnings, real estate on the balance sheet, and investments made during the previous years that should start paying back shortly.

Additionally, given strong incentives for the buyer and seemingly low valuation, it's quite possible that the offer will be increased to receive the necessary shareholder support - under UK Takeover Code scheme of arrangements have 75% approval requirements. Buyers already own 40+% of the company. Remaining insiders (not affiliated with the buyers) own around 7% of shares.

While the current offer is non-binding, I think the odds are in arbitrageurs' favor.

Cambria Automobiles is a London listed company that owns a collection of luxury and premium car dealerships (think mostly Aston Martin, Jaguar, Land Rover, and Volvo but also some legacy Ford, Fiat, and Mazda dealerships). It was established in 2006 with the goal of acquiring and combining car dealerships. Despite the somewhat lackluster share price performance since the listing (+70% over 11 years including dividends), the underlying performance of the business has been quite impressive - both EBITDA and BV/share have quadrupled during the time.

While management thus far has created quite some value they have also been very opportunistic. They brought the company public with the Burt family selling 15% of their holding to the public at £0.50/share in 2010. This was equivalent to a 25 times PE at the time and 16 times underlying earnings. They also grew the company almost entirely through acquisitions by purchasing other dealerships and integrating them in the business.

Current valuation seems compelling for the buyers to take Cambria private at a PE of less than 10x and an EV/EBITDA of 4.6x based on depressed 2020 earnings. Using 2019 figures, this equates to 8x 2019 earnings and again 4.6x 2019 EV/EBITDA. On the balance sheet basis CAMB appears cheap as well. As of Aug'20, the company was in a net cash position and had a BV/share at £0.72/share. Moreover, the current offer comes at a discount to the owned real estate valued at a net book value of £0.84/share (majority of liabilities relate to show room vehicle financing and are covered by inventory). This argues strongly in favor of a potential offer price increase going forward.

During 2018, 2019, and 2020, total investments and capital expenditure in facilities and real estate were 23.8 million, 22.2 million, and 5.4 million respectively (or more than 60% of the current market cap). The majority of the capital expenditures over 2018-2020 were spent on acquiring land and developing this land into large dealership sites, purchasing land for potential future locations, and expanding/refurbishing some of the existing showrooms and facilities. Due to the effect of the Corona crisis on the operational results, these investments haven’t shown up in the income statement yet. CAMB management targets above-average ROI and expect returns of 10%-15%. Over the last few years, the ROE varied between 13% and 16%. Even though some of these investments were replacement and refurbishment investments which I think will deliver lower returns, I would not be surprised if the investments over the last few years eventually resulted in substantial incremental earnings (net income for 2019 was £10m). So even if the deal won’t go through, the downside for arbitrageurs is likely to be limited given the low valuation and the upside from the expected higher earnings coming from these past investments.

Thus, management took the company public in 2010 at quite a hefty valuation and seems to be opportunistic again now when they want to take the company private at a low valuation. I believe this adds to the likelihood that the buyers group will not walk away.

Given the lackluster share price performance over the last few years and shareholder base that is unlikely to turn into 'activists', the transaction should pass the shareholder approval (especially if there is an increase in the offer). The only potential activist is Olesen Value Fund, which is a small value fund that owns just under 5%, however, it has made no comments on the proposal so far. The 2 other larger holders - Quilter and River & Mercantile are large, very diversified investment groups with billions of assets under management - are unlikely to raise any opposition.

Given all the above, current offer will probably succeed and no higher offer is needed to take the company private, but I would not completely rule this out.

14 COMMENTS

    1. Olivier

      The company is trading at the offer price as of this week. Personally, I have closed my position at 80 pence a share for a very nice IRR given the less than 1 month holding period and still some deal uncertainty (no binding offer yet).

  1. dt

    Thanks for sharing this idea Olivier. The spread has been eliminated for the moment, but there is still a chance of a higher offer price. As noted in the write-up management is taking this company private at a really low valuation. Recently reported interim results (ending Feb 2021) highlight the cheapness one more time:

    https://www.londonstockexchange.com/news-article/CAMB/unaudited-interim-results-2021/14963464

    For GBP80m market cap (which is the offer price) investor get:
    – Business that earned profits of GBP9.8m in H1 2021 alone (although a big part of this might be driven by UK government covering 80% of employee salaries during lock down). CEO note: “the cost base reductions initiated in the previous financial year and supported by Government stimulus, including the utilisation of the CJRS, have directly contributed to the increased profitability of the Group.”
    – Tangible net assets of GBP58m, most of which is owned real estate.

    I am guessing the market is not only expecting management to proceed with the buyout, but also to offer an improved price for the company. Independent board members might be objecting the low ball offer as well.

  2. Ilja

    Discussions are still ongoing and PUSU date has been extended one more time, without a specific deadline this time. Shares are currently trading 4% above the offer so the market clearly expects a price raise. Buyer’s incentives and low valuation also speak in favor a higher price.

  3. Ilja

    We are reopening Cambria Automobiles’ privatization idea at £0.78/share price. Since the announcement of the definitive agreement at an unchanged £0.80/share price, the buyer has already received support from 43.1% of disinterested shareholders (75% approval needed), while shareholder and court meetings were set for the 16th of July. One day before the meetings, CAMB announced that after talking to certain shareholders, the buyer asked to adjourn the meetings (new date not set yet):

    In light of ongoing discussions with certain Cambria Shareholders, Bidco has requested that the Independent Committee adjourn the Court Meeting and the General Meeting. The Cambria Directors who comprise the Independent Committee believe that it is in the best interests of Cambria Shareholders as a whole to continue these discussions and to allow all Cambria Shareholders more time to fully consider the Cash Offer and the Alternative Offer.

    The move is quite strange but seems to be positive to CAMB shareholders. From this point, two scenarios are likely:

    1. The buyer is being pressured to raise the price and will eventually increase it to persuade remaining shareholders to vote in favor. As mentioned in the write-up above, there is more than enough headroom for price increase – at £0.80/share price Mark Lavery (CEO) is getting CAMB below the real estate value and at just 8x 2019 earnings and 4.6x 2019 EV/EBITDA 2019. H1’21 performance was quite positive and despite 16% lower revenues YoY (due to 80+ days when stores were closed due to lockdowns) showed 52% increase in EPS and 30% increase in underlying EBITDA. At TTM figures, the current offer stands at 6.9x PE and 3.9 underlying EBITDA. Having said that, it wouldn’t be surprising if shareholders actually demanded a higher price in the currently ongoing discussions.
    2. The discussions are focused not on the cash offer but on the equity rollovers and we will see changes only to the alternative offer. At current terms, the alternative offer allowed shareholders to elect (instead of cash) one New Bidco share for each CAMB share held. Each New Bidco share would then be exchanged to two “Consideration shares” after the merger closed. Consideration shares will be non-transferable and have no voting rights. Moreover, the availability of consideration shares is capped at 20% of CAMB.

    Either way, when CAMB shares are trading below the offer price, the current situation offers a pretty low-risk and short-term option on the cash offer increase. The buyer is highly motivated to close the deal and 43.1% of disinterested shareholders are already supporting the merger, so I think that the risk of termination is very low. At the same time, a small bump to the offer price should not be an issue or deal-breaker here, given how cheaply the current offer values CAMB.

    Offer update – https://www.londonstockexchange.com/news-article/CAMB/offer-update-re-letter-of-intent/15051691
    Meetings adjournment – https://www.londonstockexchange.com/news-article/CAMB/adjournment-of-court-meeting-and-general-meeting/15061266
    Interim results ’21 – https://www.londonstockexchange.com/news-article/CAMB/unaudited-interim-results-2021/14963464

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  4. Ilja

    The situation still offers what seems to be a low risk 2.5% return in about a month. 82.5p offer has been declared final and the buyer already has secured 65.8% of CAMB shares (75% needed). Despite, how cheaply Mark Lavery is snatching this, it seems likely that with the support from major shareholders, this deal will get done. If the buyer collects 75% and the offer turns unconditional, the remaining shareholders will have additional 2 weeks to tender:

    If the Offer becomes unconditional as to acceptances, it will remain open for acceptance for no fewer than 14 days from the date on which it would otherwise have expired.

    If the offer fails, downside seems limited given that CAMB trades under its real estate value and under 7x TTM PE. The industry itself is riding positive tailwinds and CAMB.L peers – MMH.L and VTU.L have reported very strong interim results/trading updates just recently.

    Offer document – http://www.cambriaautomobilesplc.com/resources/camb_offer_final.pdf

    1
    1. Sean McMahon

      CAMB is trading below RE value, likely below BV, and at probably around 4x 2021 earnings. If Lavery doesn’t get the votes, I believe the upside is significant.

      1
  5. snowball

    Acceptance has reached 74.76%, just 0.24% below the 75% condition.
    Offer was extended by Bidco to 1.00 p.m. on 10 September 2021.
    Doesn’t look like Lavery needs to or will raise offer to get the final 0.24%, unless a competing offer emerges now.
    If Bidco reaches 75%, CAMB will be delisted and remaining minority shareholders may have to own private shares without liquidity.
    https://www.londonstockexchange.com/news-article/CAMB/update-on-acceptance-levels-and-extension-of-offer/15123299

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  6. Dunkincoffee

    Reminder The offering document states “If the Offer becomes unconditional as to acceptances, it will remain open for acceptance for
    no fewer than 14 days from the date on which it would otherwise have expired.” Anyone who doesn’t tender won’t be forced to take the private shares even if they do reach 75%. Therefore, what incentive is there to tender? Anyone who has already voted for can also change their votes. Little/no downside to voting no, capping upside unnecessarily by voting yes.

  7. Ilja

    Mark Lavery received enough support and declared the offer unconditional. The offer has been extended until the 28th of September. CAMB will be delisted on the 13th of October. Interestingly, shares are now trading 1-1.5p above the offer. Maybe there’s a chance of a legal challenge? Anyways, the higher bid did not materialize and Mark Lavery managed to rip off the shareholders. We are still closing the idea with a nice 6% return in 2 months.

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