So much for the idea that backing a company with a big family shareholding will guarantee that the management's interests are closely identified with those of its minority shareholders.
Morson, which supplies technical and engineering staff to various industries, has shot down the idea in flames. It was floated on the stock market at 160p a share in 2006 when it was valued at £72.8m. The Morson family, which owns 46% of the business, is now offering to take the company private at 50p a share, valuing the company at just £22.75m.
The deal looks very good news for the Morson family, but is a terrible outcome for minority shareholders who are being offered an exit at close to the share’s all-time low-point.
The Morson family, in the form of chairman and his chief executive son, have overseen a dramatic decline in the company's fortunes since its flotation. Revenues have nearly doubled, yet operating margins have halved.
Last December the company axed its final dividend with the result that the share price roughly halved from 80p to 40p.
Without the dividend cut the company's shares would probably still be trading around the 80p level and yielding around 7.5%. The company's balance sheet gave little hint of the need for a dividend cut. The company remains profitable, interest cover is 8.7 times, and a maintained 6p dividend in 2011 would have been just over two times covered. As it is, the 2p interim dividend paid is more than 6 times covered - roughly twice the average 3 times cover of the previous five years.
However, the company has now warned that it can not even guarantee any dividend at all will be paid in the current year. No wonder the share price collapsed, and the Morson family can buy back their company for around 4 times earnings and 3 times Ebitda.
The Morson family, led by Gerry (73) and son Ged (48), is buying back a business with net assets of around £60m for £22.5m. Stripping out goodwill, the price being offered is still a discount to net tangible assets. The sole independent non-exec says that it is OK.
Quite the contrary. This is a grubby deal which deserves to be voted down. But given the size of the family shareholding, and the irrevocable undertakings of some lilly-livered institutional shareholders, it will almost certainly be nodded through.
Morson’s argument for taking the company private are flaky to say the least. The family complains that the weakness of the share price has “defeated one of the core reasons” for its IPO, namely to attract and motivate good quality staff by offering them share options. It also says that share price weakness has “weakened Morson’s competitive position” in bidding for contract renewals.
Morson argues that the 50p offer price was fixed at a level which the management team “believes future debt service can be achieved without putting at risk the continuing stakeholders investment and employment prospects of the staff employed in the group.”
That might make splendid sense for the Morson family. But not for minority shareholders.
Just how bad are Morson’s business prospects?
Morson’s offer documents warns that there is not going to be any early upturn in its fortunes which casts a cloud over future dividend prospects. There is no sign of any letup in the margin pressure on major contract renewals, and the company wants to invest a lot more in building up its overseas business. It would much prefer to be allowed to reorganise its business as a private company, free from the short term scrutiny of the stock market.
Whilst sympathising with Morson’s tough trading environment it is hard to accept management’s seeming argument that the decline in profits was beyond their control. The company has been gobbling up rivals, and growth of its market share looks to have been given a higher priority than maintaining profit margins.
In the six years since Morson’s IPO, its revenues have risen 91% and the number of contractors it employs is up 58%. Its workforce has risen four fold.
Yet Morson’s adjusted operating profits have fallen for three years in a row, and, at £8.0m in 2011, are 12% down on 2005, the last year before the float.
Morson’s lacklustre performance is in stark contrast with that of NES Global Talent, a smaller local rival, which has enjoyed uninterrupted profit growth for the last seven years. Its operating margins are nearly three times as high as Morson’s. Whilst Morson is belatedly trying to build up its overseas business, to compensate for the weakness of its low margin UK business, roughly two thirds of NES’s revenues and profits are generated overseas.
The size of the Morson family's 45% shareholding, together with irrevocable undertakings from other shareholders, means that 57.37% of shareholders have already agreed to accept the bid.
There is not a lot minority shareholders can do – other than to call the family’s bluff by threatening to hang on as shareholders in an unquoted company. It would be a brave thing to do, but in 3-4 years time this company could well be resold for a lot more than it is worth now.
Filed Under: Value Investing Support Services Engineering,