The steal of the decade, or a willing bidder ending a struggling company’s difficult life on the stock market? Either way, the debate about the proposed takeover of Talktalk Telecom is not going away (Miles Costello writes). After the deadline for acceptances of Toscafund’s take-private proposal was extended again, shareholders have just over a week to decide what to do if a formal bid comes.
Talktalk was set up in 2003 by Sir Charles Dunstone, 56, as part of his Carphone Warehouse mobile phones retailer, before being spun out as a separate entity in 2010. It provides mobile, landline and television services and has more than four million customers, but more recently has been trying to build up its share of the broadband market. Sir Charles, who is executive chairman, remains the largest shareholder, with a stake of 29.86 per cent, according to data from Refinitiv. He is followed by Toscafund, the hedge fund investor, which has a stake of 29.52 per cent, so between them they control nearly 60 per cent of the business (arguably a warning sign for minority owners).
At issue is a 97p-a-share cash proposal made by Toscafund in early October, which the company’s management has agreed to discuss. Due diligence is continuing and the latest extension by the Takeover Panel expires on December 17. What sticks in the craw of some observers is that Toscafund made an offer in the summer of last year at 135p a share that was rejected on price and value grounds.
So what of the latest putative offer? Well, the second proposal came at a 16.4 per cent premium to the undisturbed share price the day before it was received. That’s not really saying much: the shares were changing hands for about 400p just over five years ago, before Talktalk was laid low by a cyberattack that cost it more than 100,000 customers. Since the proposal was received, the shares have been both above and below 97p and yesterday were up ¼p, or 0.3 per cent, at 95¾p.
According to Jerry Dellis, an analyst at Jefferies, the best way to value a telecoms group is to use a variation of the traditional ratio of share price to earnings. He uses enterprise value — or Talktalk’s debt and equity combined — divided by its operating free cashflow, effectively profits before tax and exceptional items, minus capital expenditure. Based on that metric, Jefferies finds that 97p a share values Talktalk at 11.5 times its 2022 forecasts, a clear discount to the 13.5 times at which the European telecoms sector trades. Mr Dellis and his team reckon that it would take an offer of about 130p to value the group in line with its European counterparts.
Would that it were so simple. As Mr Dellis points out, Talktalk has an unfortunate record of regularly incurring substantial exceptional costs, which can distort forecasts. In 2018, for example, having warned about its profits, the group took a £97 million hit to cover restructuring costs. Shareholders won’t forget that it also lowered its guidance, cut the dividend and turned to investors for a £200 million capital-raising.
So there’s the rub. This is a company in mid-turnaround, facing the prospect of having to pay BT’s Openreach higher wholesale prices under a new regulatory regime but with no guarantee that it can successfully charge its own customers more. James Congdon, global co-head of Quest, a division of Canaccord Genuity, has had Talktalk on his “sell” list for three years and, with debts approaching £1 billion, reckons it may be best for Toscafund to remove it from the public market and fix it quietly. He may be right, but it doesn’t follow that shareholders should have to sell on the cheap, which this bid would mean. If it comes, they should reject it.
ADVICE Reject bid
WHY At the proposed level, the likely bid clearly undervalues Talktalk and its prospects for a turnaround
Numis
It’s been a bumper year for Numis — and its staff (Ben Martin writes). The Covid-19 outbreak has led to a boom in business for the independent investment bank and stockbroker, as companies have scrambled to raise cash either to strengthen their finances or to take advantage of opportunities thrown up by the pandemic. Numis has ridden a wave in stock market trading, too, as investors sought to position their portfolios this year. And, as a result, pre-tax profits trebled to £37.1 million in the 12 months to the end of September from revenues that were up 38.8 per cent at £154.9 million. As a result, bonuses for Numis employees are up, propelling staff costs at the business to £76 million, from £53.6 million a year earlier.
Investors in the company also have benefited. Shares in the group started the year at 299p and although they dropped to as low as 167p during the depths of the coronavirus slump, they have rebounded impressively, a 2½p, or 0.7 per cent, drop yesterday leaving them still at 341½p. The decision now is whether the increase in business that has lifted Numis’s revenues, profits and share price has further to go.
The group was created in 1989 after a merger of Hemsley & Co Securities with Raphael Zorn. Alex Ham, 38, and Ross Mitchinson, 42, run the company as its co-chief executives.
Revenues at its capital markets business were up 59.3 per cent to £77 million, boosted by a spate of Numis clients using its services to raise cash. This more than offset an 11.4 per cent fall in advisory revenues to £11.1 million after the pandemic curtailed mergers and acquisitions. Its smaller equities business, which lifted revenue by 42.5 per cent to £53.2 million, was helped by a fourfold increase in trading revenues to £16 million.
While the pace of fundraisings in the wider market is tailing off, M&A and flotation activity is reviving. Since the year-end, Numis’s equities business has been buoyed by Covid-19 vaccine breakthroughs, which triggered frenetic trading activity in markets last month. Even if the forthcoming months are not as busy as its past year, there is still plenty of business for Numis to go after.
ADVICE Hold
WHY Outlook remains bright
