It's fair to say shares in Jumbo Interactive Ltd (ASX: JIN) haven't had a dream run since the company announced its takeover of Dream Giveaway USA earlier this week.
Jumbo shares fell 5% on the news to $12.06 on the day and have continued to be weaker, changing hands for $11.99 on Friday.
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Strategic acquisition
The lottery company announced earlier this week that it would acquire the US company for $57.8 million, providing an entry point into the US prize draw market.
Jumbo said the company had a proven business model and stable earnings over the past five years, and management expected it to deliver low-to-mid single-digit earnings per share accretion in the 12 months post-completion of the deal.
Jumbo managing director Mike Veverka said at the time, "Jumbo can accelerate the business with its software platform and 25 years of digital marketing expertise''.
The deal follows just weeks after Jumbo's $110 million acquisition of Dream Car Giveaways UK.
Integration risks
Jarden analysts said there were pros and cons to the deals.
As they said in a note to clients:
Whilst we view ongoing diversification of Jumbo's earnings base away from The Lottery Corporation and jackpot dependencies positively, we see elevated operational/integration risk post-acquisition, and reduced balance sheet strength. The acquisition provides Jumbo with another larger geography to execute on its business to consumer growth ambitions.
Jarden says the two deals could have an impact on Jumbo's dividend payments, saying the company has now exhausted most of its debt capacity.
With its capital management policy now under review, we expect Jumbo will continue to pay dividends at lower end of prior payout range (65%-85%). Whilst weakened, we see Jumbo' net debt position as manageable.
And while they see the growth by acquisition as a positive for the company, the deals come with integration risks, Jarden analysts said.
Longer term, we see scope for significant capital-efficient earnings growth leveraging proprietary technology across geographies.
The Jarden team have reduced their price target on Jumbo shares from $14.10 to $13.70, "on modest positive earnings revisions offset by the pro-forma net debt position''.
This still compares favourably with the closing price of Jumbo shares of $12.19 on Thursday, and once dividends are factored in, Jarden is expecting a total shareholder return over 12 months from Jumbo shares of 16.5%.
Jumbo was valued at $772.4 million at the close of trade on Thursday. The company is scheduled to hold its annual general meeting on 11 November.
