Shares of leading consumer and industrial product company, GUD Holdings Limited (ASX: GUD), were frozen in a trading halt this morning as the group undertakes a distasteful capital raising to fund an acquisition.
In an announcement to the ASX this morning, GUD said it has entered into an agreement to acquire Brown & Watson Pty Ltd (BWI) for $200 million and up to an additional $20 million of earn-outs.
From a strategic perspective the deal makes perfect sense. As GUD chief executive officer Jonathan Ling said, "Established over 60 years ago, BWI is a leading automotive aftermarket business which owns the NARVA and Projecta brands in Australia and New Zealand."
He said BWI will complement GUD's existing automotive business which houses brands such as Ryco, Wesfil and Goss. "BWI, together with our existing GUD Automotive business, will provide GUD with a considerably broader product offering to our customers in the growing automotive aftermarket and specialty segments," Mr Ling said.
According to BWI management, its NARVA brand controls 24% of the lighting and electrical accessories aftermarket which generates roughly 75% of revenues. Meanwhile the Projecta brand has 19% share of the battery maintenance and power products market and accounts for 15% of group revenue.
Following the acquisition, GUD says BWI will contribute $27.9 million to financial year (FY) 2016 earnings before interest and tax (EBIT). In FY15, it'll generate EBIT of $26.6 million on sales of $109 million. The transaction is expected to be mid-teen earnings per share accretive.
Based on anticipated earn outs of $9.1 million, transaction costs of $5.8 million and the $200 million base purchase price, it appears GUD has paid 8.1x forecast FY15 EBIT for BWI.
Raising capital
GUD intends to pay for the acquisition using three sources of capital:
- $131.5 million of debt will be drawn from a recently refinanced debt facility (which will raise group debt from $120.4 million to $259.7 million)
- An institutional offer of 10.6 million shares at a floor price of $7.00 will raise at least $74.5 million.
- Eligible shareholders who were on the company's registry at 7pm (Melbourne time) on 11 May 2015 can take part in a miniscule share purchase plan (SPP) which will raise $15 million. Up to $15,000 worth of shares can be bought at a 2.5% discount to the volume weighted average price (VWAP) up to and including the date the SPP is scheduled to close (5 June 2015).
Should you take part in the capital raising?
I don't follow GUD Holdings particularly closely but there are a few immediate concerns I have with today's announcement.
Firstly, on the face of it, the purchase appears expensive. Although it could be argued GUD shares currently change hands at an enterprise value to EBIT (EV/EBIT) multiple of 21x (based on FY14 annual results), therefore the BWI acquisition will improve intrinsic value; one wonders how many other firms were in the bidding process for BWI and whether a cheaper price could've been attained.
Nonetheless, if management can drive significant synergies out of the business then the price paid will likely prove a fair one.
My second and most important qualm with today's announcement is the disregard for retail shareholders.
Companies frequently palm off retail shareholders by arguing retail placements are too slow or an expensive way to raise capital and therefore raise money through institutions.
The problem with GUD's capital raising is it dilutes retail shareholder ownership. That means, if you're a shareholder reading this, you now own less of a larger company!
Here at The Motley Fool Australia, we've long argued the fair way to raise capital is to undertake a pro-rata renounceable rights issue which enables all shareholders to participate in any capital raising. And, if they can't afford to buy new shares, they can sell their rights.
At the time of its last annual report, GUD's top 20 shareholders had 39.23% of all shares. However there were 12,218 shareholders on the registry.
Remember, as a sharemarket investor, you are a part-owner of a business. If you owned a pizza shop would you let your shop manager dilute your shareholding? I doubt it.
Foolish takeaway
Ultimately, today's announcement represents a good use of funds but showed a distasteful way of raising capital.
