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Will $5.20 Fill the Missing Link?
Shareholders of Link Administration Holdings (LNK), which provides services to the funds management and superannuation sectors and runs the share registry for many of the S&P/ASX 200 companies, have become the latest group to experience the tailwind that a takeover offer can suddenly blow on to a becalmed share price.
Last weekend, a consortium of two private equity giants, Carlyle Group and Pacific Equity Partners, offered $5.20 a share for LNK, which gives an enterprise value of $3.8 billion for the company, encompassing equity, debt, and the pending acquisition of Irish group Pepper Servicing, worth $266 million, which is still to be settled.
That is not bad for a stock that was trading at $3.99 on Friday, having traded as low as $2.70 in the depths of the COVID Crash in March; but it is well below the $6.42 at which Link changed hands before that event.
The Carlyle/PEP offer is also a sour reminder of the company’s float in October 2015, in which it hit the ASX screens at $7.10, an 11.5% premium to the $6.37 offer price – having been floated by none other than PEP.
Link is actually a very different company to the business that PEP floated five years ago, which had three operating businesses, of which the superannuation administration business accounted for half its earnings.
Today, Link has five operating segments, and the super administration business is responsible for only one-quarter of the earnings.
The jewel in the crown is considered to be the digital property conveyancing and settlements business PEXA, which manages almost all transfers, mortgages and discharging of mortgages across Victoria, NSW, Queensland, SA and WA, generating about $170 million in fees.
Link owns a 44% holding in PEXA, which is regarded by investors as having much more upside than the core Link business, which is being buffeted by regulatory change, a flood of superannuation withdrawals and the broader economic fallout from the COVID-19 pandemic.
Link handles 8 million super accounts and has been at the forefront of distributing cash to the two million Australians who have gained early access to their super under the federal government’s emergency COVID-19 access scheme.
The Carlyle/PEP consortium said its $5.20 offer represented a 30% premium to LNK’s closing price on October 9, and a 34.5% premium to the 10-day volume weighted average price. Link shares jumped by 23% in response to the offer, and by the close on Monday were up 25% cent at $4.99: LNK touched $5.03 on Tuesday, and currently trades at $4.92.
Fund manager Perpetual, which owns 9.65% of Link, has stated that it is happy to take the $5.20 offer. But the second-largest shareholder, Yarra Capital Management, which owns 6.8% of Link, is not so sanguine, stating that it is too cheap, and an indication of a looming rush of opportunistic buyout offers that are likely to be made for companies, taking advantage of the economic downturn.
Shareholders would have been very heartened to hear Dion Hershan, head of equities at Yarra Capital, saying that the proposal does not put a high enough value on LNK: “at an initial glance it doesn’t look like a compelling offer,” Hershan said.
The key appears to be how PEXA is valued. Many people believe it is worth a lot more than the $700 million value at which it is carried in Link’s books.
It’s been reported that Carlyle and PEP are working on a structure that would allow shareholders to take all cash, or a mixture of cash and PEXA stock – which could be listed through an IPO or demerger, depending on the approval of other major shareholders.
That may interest some shareholders, who want the chance to participate in the company’s main growth business: others may share Yarra Capital Management’s view that the offer for the whole is lowball. (Morningstar, for example, supports this view, rating fair value for LNK as $7.70.) Others, however, might look at analysts’ consensus valuations for LNK shares – $5.12 at FN Arena, according to target prices updated for the bid, and conclude that $5.20 is pretty fair.
