Capita traditionally has grown by acquisition, but the deals are getting bigger — and riskier.
In February the outsourcer announced the €210 million purchase of avocis, a German call centre business. The purchase of Xchanging will be for £412 million, assuming that the present offer at 160p a share goes through, or it could cost more if Capita is forced to raise its offer.
Capita started the process yesterday by posting the formal offer document to Xchanging shareholders. Apollo Global Management, the American private equity firm, has up to 53 days to make an offer of its own — and it is known to be considering a bid at 170p. The Xchanging share price, up 1p at 167p, suggests the market thinks that a higher offer will be forthcoming.
Capita says that it can make £35 million of synergies from the deal by merging the businesses and saving on IT and head office costs. This amount almost certainly will be exceeded if the transaction goes ahead. The deal will strengthen its hold on insurance, in Lloyd’s in particular.
Xchanging shareholders, though, should hang on rather than rushing to accept. They will be aware that the company has a chequered history, having issued a profit warning in July.
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In that respect, the Capita offer can be seen to be opportunistic — the two had talks in 2011, when Xchanging was also going through a rough patch. One big investor is seeking nearer 190p a share, but it is not clear if, given the lack of obvious synergies, Apollo can make an offer pay at this level.
For Capita, the deal would gain it access to its quarry’s Xuber platform, which automates paperwork and could be used elsewhere in its insurance business. If it comes in at the present price, it will pay its way from day one — one analyst is looking for a 4 per cent increase next year, rising to 7 per cent in 2017.
It will be funded by a placing at a later date, but this does not look too dilutive, given Capita’s £8 billion-plus market capitalisation.
I was wary of Capita shares in the summer and they have marked time since. Off 3p at £12.61, they sell on 18 times’ earnings. Not obviously cheap, but worth it if the Xchanging deal can be pulled off at a decent price.
Value of Xchanging bid 160p
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MY ADVICE Buy
WHY Xchanging deal looks a good one, even if Capita has to pay a bit more, while shares look more reasonably priced than in summer
For a company that makes its living letting out temporary storage, Lok’nStore makes the occasional bob as a property developer. The company is the smallest of the three quoted businesses in this area and is the only one that is not a Reit. Instead, its AIM quotation makes it a shelter against inheritance tax, which in turn makes it popular with retail investors, who hold about a third of the share capital.
The company has sold one store in Reading for £4.9 million and this funded the construction of a larger one near by while bringing in a little profit. Its experience in Portsmouth was less successful and led to a £1.6 million impairment charge as the site was abandoned.
One of the main attractions of the shares was a decent dividend yield, but this has been reduced as the shares advanced, up by more than 20 per cent this year, including an 11p gain to 307½p yesterday after results to July 31 showed all the relevant metrics going in the right direction. The yield is now below 3 per cent, but the payment is more than twice covered by Lok’nStore’s main measurement of profits and there is scope for a further increase. The company has 26 stores and is adding a couple each year. The main constraint on growth is the availability of new sites, given that it is focused on the southeast and is limited to sites that cannot be used for anything else.
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Unlike the rest of the sector, which trades on a premium to net assets, Lok’nStore’s shares are equal to its NAV, which suggests the prospect of further improvement in due course.
Revenue £15.4m
Dividends 8p
MY ADVICE Buy long term
WHY Good prospects for rise in dividend payments
There was no great concern in the market about a negative ruling from the US Food and Drug Administration on Shire’s lifitegrast treatment for dry eye disease — the assumption is that the compound will come to the market next year and that it will be worth more than a billion dollars a year in sales to Shire in due course.
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An earlier slight fall in the price was reversed as American buyers scented an opportunity and came into the market, and Shire shares ended up 115p at £46.26.
Of more concern is the progress of Shire’s attempt to merge with Baxalta, a fellow rare diseases drug developer spun out of Baxter International in the summer and immediately subject to the approach. Nasdaq biotech companies have lost about $150 billion in value since amid concerns that the US authorities will crack down on prices.
Shire’s approach was then worth $45.23 for each Baxalta share, but that sum has come back to about $35. The investors will end up with more than a third of the merged group, so there is every reason for the offer to proceed, if slowly.
Shire shares sell on 19 times’ earnings and look decent value again.
Original price for Baxalta $30bn
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MY ADVICE Buy long term
WHY Share price fall looks overdone
And finally . . .
The strength of the London property market, and of the technology belt around Old Street and Clerkenwell, never ceases to amaze. Derwent London is one of the purest plays in the sector and it says that it has let £4.1 million-worth of space in this area over the past couple of months, including at the White Collar Factory on Old Street itself. The average tech belt letting has gone out at levels a fifth higher than the estimated rental value in the summer. Derwent shares are up by 15 per cent since I tipped them in August.
Follow me on Twitter for updates @MartinWaller10