On the same day that it released its full-year earnings results, Metcash Limited (ASX: MTS) also announced that it had sold its Automotive Division to automotive aftermarket parts business Burson Group Ltd (ASX: BAP) in a deal that dominated news headlines.
Here are 10 things you need to know about the transaction:
- Price. Burson will purchase the business for $275 million. That compares to the $350 million Metcash had hoped to receive in an initial public offering (IPO) for the division, and the $460 million that Credit Suisse had believed it could be worth.
- Value. The purchase price represents a multiple of 9.9 times full-year 2015 (FY15) earnings before interest and tax (EBIT). Metcash expects to receive net proceeds after tax of $210 million from the sale.
- The Acquisition. The acquisition will include brands such as Autobarn, Autopro, ABS and Midas, expanding Burson's Do-it-for-me (DIFM) and Do-it-yourself (DIY) offerings.
- Metcash's rationale. Metcash introduced the idea of an IPO for the business just one month ago. While it could have received a greater price for the business by undertaking an IPO, it would have been a longer, more drawn out process with no guarantee of success.
- Investment. By selling the business to Burson for $275 million, Metcash will receive the money much sooner, allowing it to invest in its core Food & Grocery division which has been struggling due to intense competition from Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).
- Burson's Rationale. When Metcash announced it was investigating an IPO, Burson told the Fairfax press that it would consider an acquisition if it was economically viable due to the low level of overlap between the businesses. While it has traditionally targeted a slow and steady expansion (and will continue to do so in the future), the price was too great to refuse in this instance.
- Funding. Burson will raise a combination of debt and equity financing. This will include a $218 million Entitlement Offer (see below); a $15 million placement; and $71 million from increased debt facilities (note that this equates to a total of $303 million, allowing for transaction fees and a potential adjustment to the purchase price for a specified acquisition).
- Entitlement Offer. The offer will be structured as an underwritten 7 for 15 pro-rata accelerated renounceable Entitlement Offer at $2.85 per share. Basically, that means that for every 15 shares that you own, you are eligible to purchase 7 new shares at a discount to the stock's current price of $3.40.
- Trading Halt. Burson Group will remain in a trading halt until Thursday pending the capital raising.
- Looking Forward. The acquisition will not impact Burson's target to have 175 Burson-branded stores by June 2019. Burson also confirmed that it intends to pay a final dividend (for the second-half of FY15) of 4.7 cents per share, including the new shares that will be issued under the offer.
Burson Group has generated enormous returns for shareholders since it listed on the ASX in April 2014, and looks set to continue doing so into the future with Australia's automotive aftermarket sector experiencing strong and predictable growth. At $3.40 per share, Burson seems like a great buy today.
