The latest deal from 3i is an odd one and perforce a bit of a mixed bag. The venture capital group is creating a new fund with commitments of £700 million, and putting in £36 million of its own cash, to acquire four infrastructure assets. These are Belfast City airport, East Surrey Pipelines, a gas and electricity utility, a stake in an Italian waste treatment and disposal company, and four transport concessions in Spain.
The assets are the remaining ones in the Eiser Global Infastructure Fund, managed by Eiser Finance. The assets will transfer across to the new vehicle; the two biggest investors in the fund, two European pension funds, will remain, while the others, the usual collection of institutions, will be given the opportunity of cashing out or maintaining their holdings.
This makes the quantum of the deal impossible to assess, though plainly it will be less than the £700 million being raised by the new fund. It is effectively a transfer of management of those assets to 3i, with the hope that they can be managed to greater advantage and the possibility that the fund can use the extra cash to find other acquisitions that will enhance their value. One might expect them to be flipped into 3i’s existing infrastructure fund, which is quoted and features regularly here, but they are not suitable partly because of those southern European assets, which are outside that fund’s remit. It is clearly an opportunistic deal whose potential is hard to assess because it is not clear how profitable they are at present; from the perspective of 3i investors, there is considerable upside.
3i’s half-year figures last month showed the group moving forward. Net assets per share were ahead from 463p in March to an impressive 551p, with a large number of exits from investments at a good return.
The shares are regularly recommended in this column and are another of those that should not cause investors too many sleepless nights. If there is a downside it is that the shares’ progression, up another 5p to 687p yesterday, makes the yield on them less attractive. Assuming the promised 22p dividend this year, that yield is just 3.2 per cent. Existing holders, though, will not be complaining and should definitely hold on.
MY ADVICE Hold
WHY 3i is a solid enough investment making strong progress on all fronts but dividend yield is now somewhat less compelling
Inchcape
There are, says Inchcape, as many as 25 businesses around the world like the one the car dealer is buying in South America but it is a moot point when they will come on to the market. Inchcape’s strategy is to build up its network of dealerships in areas where it is under-represented, with South America a prime example, while extending its relationships with the manufacturers whose cars it sells.
The purchase of the franchises to sell Subaru cars and Hino trucks in four Latin American countries achieves both these goals because of existing links with the two — Hino is an arm of Toyota. Inchcape already sells BMWs in Chile and Peru, so the £234 million deal extends its operations into Argentina and Colombia while taking it into non-luxury cars and commercial vehicles. The deal took place because the owners are ageing and keen to sell.
Inchcape’s hefty cash generation means it can be paid for out of its own resources, even if this is the biggest purchase the company has carried out for a decade or more. The share purchase programme that has been used to soak up some of its excess cash will probably carry on in due course. The company believes that the Latin American market is ripe for expansion because there is an under-supply of motor vehicles, while Chile, the biggest market of the four, is recovering rapidly on the back of the improvement in the copper price. Inchcape shares have not done a lot this year though they gained 50p to 692p yesterday. On 12 times’ earnings, they look good long-term value.
MY ADVICE Buy
WHY Share price multiple looks reasonable at this stage
HSS Hire
When you have debt of £240 million, raising £13 million by means of a share placing may seem like a drop in the ocean. HSS Hire, one of the most woeful performers of any flotation of recent years, is as part of its recovery programme building a new national distribution centre and making its chain of outlets serving customers more efficient.
This is costing £15 million or so, and the company has gone to its two biggest investors, Toscafund and Exponent, the private equity firm that floated the company in February 2015, and asked them to pay for it, with a complicated tax-led arrangement whereby it all gets routed through a Jersey vehicle. Having floated the shares at 210p, though it did not take much cash out at the time, Exponent is buying them at just short of 84p, as is Toscafund, which now holds more than 25 per cent.
That might be taken as a vote of confidence in HSS, whose shares, off a penny at 83p, are just where they were when this column suggested avoiding them in April.
On 23 times’ next year’s earnings, and despite that apparent vote of confidence, it still looks too early to get back on board.
MY ADVICE Avoid
WHY Recovery continues but somewhat slowly
And finally...
One of the more interesting deals to watch in the new year is Greencore’s purchase of Peacock Foods in the US. The experiences of UK retailers moving across the Atlantic have often been difficult, but Greencore has a good record of supplying chilled foods such as sandwiches in the UK and Peacock does much the same in the US. The rights issue to support the $747.5 million purchase has just gone through without difficulty, and the few outstanding shares not taken up have been snapped up at a slight discount to the market price.
