Sometime in October 2023, without consulting shareholders or explaining its thinking, Aim-traded Equals (EQLS) asked “a limited number of potential counterparties” if they would consider bidding for the payments group.
On 30 October last year, despite a lack of news, heavy buying pushed up the share price from £1 to £1.06. Then, following press speculation on 1 November, Equals confirmed its backdoor move and the shares hit £1.17. Almost a year on, and despite the eventual arrival of an apparently fully financed £1.35-a-share bid from a three-party consortium, the shares are at £1.11.
According to Peel Hunt, the initial bid premium for UK-listed companies above £100mn has averaged 35 per cent so far this year, climbing to 40 per cent after negotiation. In Equals’ case, the initial premium above 31 October’s closing price stands at 31 per cent, although this fails to reflect an 11 per cent subsequent rise in the Aim 100 index, or the major growth in Equals’ market share and underlying profits since those counterparties were first approached.
Baffled, dubious, or simply bored, the market’s response has been to pass over what looks like free money left on the table. It’s a deeply odd situation.
Last week, after the group’s 11th consecutive monthly “strategic review update” – once again informing investors of an extension to the put-up-or-shut-up (PUSU) offer period, once again reminding investors that there can be no certainty of a formal offer – we put the following five questions to management:
1) How much longer will this take? While recent updates describe negotiations as being at “an advanced stage”, investors have been in the dark for nearly a year, and still lack a timeline.
2) At what point would management let the PUSU lapse? Not only is the investment case clouded, but an open-ended due diligence process raises all sorts of competitive risks.
3) When will you explain the logic for the sale? While third-party interest offers validation, Equals’ interim results again demonstrated it can grow strongly from a self-funded model.
4) Why should shareholders vote for a bid at £1.35? Despite the payment of £2.8mn in dividends, net cash climbed from 9.9p to 10.9p per share in the year to June, and annual adjusted Ebitda is now running above £25mn, against an enterprise value of less than £190mn.
5) Are negotiations aiming for a higher offer? At £1.11, the shares trade at less than 13 times forward earnings, compared with a multiple of 17 prior to the strategic review. On current consensus forecasts, a 17 times earnings multiple would today value the shares at £1.47.
While Equals declined to comment, it will eventually need to provide some answers.
Bluntly, the board should either press for a price that reflects the business’s strong reported momentum or explain clearly why its long-term prospects are captured in a cash-adjusted price of less than £1.24. Throughout this very strange process, the ball has been in their court; as we detailed in April, Takeover Code rules mean it is in Equals’ gift to extend the PUSU.
Of course, a £1.35 cash bid, just about at the all-time high, would represent a realised profit to all but a small fraction of Equals’ diversified shareholder base. But this isn’t how takeovers are meant to happen, as Rightmove (RMV) correctly showed in its refusal to engage with REA’s low-ball approach.
Equals may not possess the property platform’s scale, market domination, prospects, or economic moats. But some principles – including the need to properly communicate with owners of a company – should apply no matter what.
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