Market Tracker weekly bulletin – 25th October 2018
A round up of key developments in corporate transactions covered by Lexis®PSL Corporate and Market Tracker this week, including key findings from our recent UK Public M&A Q3 review, IPO updates on Smithson Investment Trust LLP and Blue Ocean Maritime Income plc, and coverage of Softcat’s special dividend together with an analysis of special vs final dividends in our ‘In focus’ section.
UK Public M&A Q3 update
Lexis®PSL Corporate and Market Tracker has conducted research to examine the current trends in respect of UK public M&A for the period between 1 July 2018 to 30 September 2018 (Q3 2018).
The report reviewed a total of 24 transactions that were subject to the Takeover Code (Code): 13 firm offers and 11 possible offers. Key findings include:
- schemes of arrangement remain the preferred choice of structure with 9 out of 13 (69%) firm offers announced in Q3 2018 structured as schemes and 4 out of 13 (31%) structured as contractual offers
- despite deal volume being higher in Q3 2018 compared with Q3 2017 (13 firm offers compared with 11 firm offers in Q3 2017), the aggregate deal value was lower
- the average deal value for Q3 2018 was £673.1 million, which represents a 45% decrease on the average deal value recorded in Q3 2017 (£1.2 billion)
- Q3 2018 continued the trend seen in 2017 where deal activity was spread across a variety of industries
- all the firm offers had a cash element, either solely or in combination with another form of consideration, accounting in total for 100% of firm offers announced in Q3 2018 and being the exclusive form of consideration in 84% of deals, and
- Q3 2018 saw a variety of funding structures with debt finance being the preferred form of finance structure
Data for this report has been sourced from the Market Tracker transaction data analysis tool which allows users to access, analyse and compare the specific features of numerous corporate transactions. To read the report in full see our blog post: UK Public M&A Trend Report update—1 July–30 September 2018
Equity Capital Markets
Smithson Investment Trust LLP
Smithson Investment Trust LLP (the company) began trading on the London Stock Exchange's Main Market on 19 October 2018.
The company had initially announced an IPO seeking to raise gross proceeds of £250 million, as outlined in the company’s prospectus pursuant to the listing. Following an increase in investor demand, the company raised the target gross proceeds to £600 million. On listing, the company surpassed this target, reporting gross proceeds of £822.5 million, significantly higher than the original initial target issue.
Smithson has attracted the largest amount for any investment trust launch, surpassing Woodford Patient Capital’s £800m IPO in 2015.
Blue Ocean Maritime Income plc
On 19 October Blue Ocean Maritime Income plc, the shipping investment trust, postponed its planned IPO. Blue Ocean is the most recent company to postpone a potential listing this year. The company announced last month that it was aiming to raise £190 million through the proposed listing. The company later stated that the listing had been postponed due to insufficient subscriptions for its placing and open offer. Blue Ocean reported that the level of confirmed orders for the issue were below the minimum net proceeds required. The company attributed this to challenging market conditions.
Returns of value to shareholders
Softcat announces special dividend
On 17 October the board of Softcat plc recommended a ﬁnal dividend of 8.8p per ordinary share and a special dividend of 15.1p per ordinary share to be paid on 14 December 2018. Shareholders will be asked to approve the ﬁnal and special dividends at the AGM on 6 December 2018.
The announcement was accompanied by very positive preliminary results for the period to 31 July 2018 which indicate revenue growth of 30% to £1,081m on 2017 and operating profit growth of 36% to £68m. Earnings per share are up 37% to 27.6p and the total dividend relating to 2018 is up 21% to 27.2p.
The IT infrastructure provider, currently celebrating its 25th year, shook off concerns about political and economic uncertainty and predicted a similarly successful 2019.
The CEO, Graeme Watt, cites hybrid infrastructure, security, digitation and the Internet of Things as the company’s fundamental drivers for growth. He notes:
‘It is becoming clear that many organisations have, or will adopt, a hybrid infrastructure strategy placing workloads both into the cloud and into on-premise datacentres. As our customers develop their IT infrastructure they need new technology, design advice, project management support, implementation capability, and ongoing maintenance and monitoring. Softcat caters for all of these needs either directly or through carefully selected third party partners.’
Among its risk factors Softcat notes the impact of Brexit on business confidence but appears to rely on the mitigating strategies of close dialogue with supply-chain partners to ensure all potential Brexit scenarios are planned for, a customer-centric culture and a breadth of proposition and customer base.
In focus - Dividends: special vs final
In general, a final dividend is recommended by the directors after the end of the financial year and declared by ordinary resolution of the members at the annual general meeting at which shareholders also approve the company’s annual report and accounts. In contrast a special dividend is an interim dividend paid during a financial year, but is labelled as a ‘special’ to indicate that it is a one-time event and outside of the company’s usual dividend payment pattern. Subject to the articles, and like any other interim dividend, the directors usually have discretion to pay special dividends with no further members’ approval.
The advantage of a special dividend is that unlike normal (interim or final) dividend, there is no expectation by shareholders that they will continue receiving higher regular payments on an ongoing basis. Special dividends are essentially considered exceptional events. In addition, after the record date, the share price will almost always decrease by the special dividend amount. Whilst this also applies to regular dividends, the difference is that a regular dividend, especially one that grows along with a company’s earnings, is a sustainable, long-term way of boosting shareholder value.
Our Market Tracker Trend Report on Dividends showed that special dividends were paid by just 28 companies in the FTSE 350 during the period analysed by the report (9 FTSE 100 and 19 FTSE 250 companies) with the companies paying the most special dividends being in the Investment, Travel, Hospitality, Leisure & Tourism, Property, and Financial Services sectors.
A special dividend sounds like an obvious way to share good results, so what is the downside? Commentators often point to the fact that the company may be running out of opportunities to increase growth. One of the most famous examples of a special dividend was that paid by Microsoft in 2004, a dividend of some $3 per share, or a total value of $32billion. After the announcement the share price spiked more than 5%. On the ex-dividend date (November 15, two days before the record date) the share price, as predicted, fell by almost 9%, representing the $3 per share special dividend.
Microsoft stock remained relatively flat over the next few years, with a peak (adjusted for splits and dividends) of around $28 in late 2007. From 2013 it began to take off, currently hovering around $109. Softcat shareholders will no doubt be hoping for a similar trajectory.
Government issues fourth tranche of technical notices on no-deal Brexit
On 12 October 2018, the government issued its fourth tranche of technical notices on a no-deal Brexit scenario. One notice in the tranche gives an explanation of implications for businesses operating across the UK-EU border and European specific entities in the event that the UK leaves the EU in March 2019 with no agreement in place.
Lexis®PSL Corporate has compiled summaries on Accounting and audit if there is a no deal Brexit, setting out the implications for accounting, corporate reporting and audit after 29 March 2019 if the UK leaves the EU without an agreement in place, and Structuring your business if there’s no Brexit deal, covering businesses operating across the UK-EU border, or who have taken on the form of a European specific entity, including European public limited liability companies (or Societas Europaea) (SEs) or European economic interest groupings (EEIGs). It also covers European groupings of territorial cooperation (EGTCs). (Subscription required).
FRC calls for improved reporting
On 24 October 2018, the Financial Reporting Council (FRC) published its Annual Review of Corporate Governance and Reporting 2017/18 (the Review). The Review covers 220 annual and interim reports and three substantive thematic reviews conducted by the FRC on significant reporting issues. The FRC stressed, amongst suggesting other key areas of improvement, that companies and their auditors ‘cannot overlook the basics and must ensure observance of the specific rules and requirements of accounting standards on which investors rely’.
In addition to the Review, the FRC also published an open letter to Finance Directors and Audit Committee Chairs (the Letter). The Letter calls for improvements in key areas of corporate reporting including more detailed disclosures as to how companies have applied the principles of the UK Corporate Governance Code.
The Letter also discusses ‘topical areas of reporting’, unsurprisingly citing Brexit as one market development companies should be providing information on to shareholders and potential investors. The FRC are encouraging companies to distinguish between specific and direct challenges to their business posed by Brexit, and broader economic uncertainties applicable to business generally. Brexit is an area we have explored within our forthcoming AGM Trend Report, whereby we have investigated the number of, and quality of, Brexit disclosures within companies’ Annual Reports.
More detailed analysis on this story can be found on LexisPSL Corporate (subscription required).