Current Price: £0.75
Offer Price: £0.80 (higher offer is expected)
Expected Closing: Q3 2021
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.