In case you're new to the G8 Education – Affinity takeover story, here's a quick recap:
- Affinity Education Group Ltd (ASX: AFJ) announced a profit downgrade
Shares subsequently collapsed 35% to 53 cents in yesterday's trade. During the day, a competitor used the falls to take a significant stake in Affinity.
- G8 Education Ltd (ASX: GEM) bought a 16% stake in Affinity at $0.70
This morning, G8 Education announced a full takeover offer for Affinity at a 'price' of 4.61 G8 shares for every remaining Affinity share, valuing Affinity at $0.70 per share.
- After lunch Affinity rejected the unsolicited approach as 'opportunistic'
Foiled perhaps, but I feel that the rejection is a boon for G8's management and shareholders alike. At $0.70 per share Affinity is valued at roughly 6x its earnings – outside of G8 management's preferred range to purchase centres at. More costly centres are ultimately a drag on earnings requiring more shares and debt to pay for.
The temptation to acquire another 161 centres may have been too good to pass up – especially given the offer was in shares only – but G8 would have been paying a premium for what are effectively average centres, with Affinity's occupancy levels well below last year's 80%.
G8 may think they can turn the centres around, but I think that if the solution to low occupancy is that simple then Affinity would be doing it already.
Besides, Affinity shareholders and management were never going to settle for letting the company go for a measly 6 times earnings. Not only is $0.70 substantially lower than the $1 the company listed at, but it is also a price multiple substantially below the average price of similar roll-up companies like G8.
Given that Affinity was a clear G8 hopeful when it started out, everyone involved is bound to be hoping for bigger and better things.
It's not all bad for G8 shareholders though since they avoided paying too much for average assets, which is a win in my book. I also think the holding in Affinity could be useful in the future, assuming G8 isn't forced to sell out for one reason or another.
I'm not sure the same can be said for Affinity shares. While stocks soared today the company is still bound to lag under weak performance, low occupancy, and weak prices which will affect its ability to trade new shares for acquisitions.
