TUA - Turners Auctions. A Case Study.

[Snoopy]

If it is not up to date, management should have updated the market. Given they have just raised $30Mil from retail and institutional investors, they are legally obliged to ensure continuous disclosure.

“If the takeover proceeds we would expect the Dorchester group profit before tax in the 2016 year to be in the $20 million to $25 million range, depending on our ultimate shareholding in Turners”, said Mr Byrnes.

I think you need to look at this quote more closely.

Basic annualised earnings of TUA are $4.916m (NPAT)
Number of shares in TUA are 27.375m
So eps = $4.916m/ 27.375m = 18.0cps

At a cash share price of $3 (The acquisition price), the net yield is: 18/300= 6%

TUA is issuing bonds to help fund the takeover, and is paying 9.0% interest on those bonds. Therefore the more shares that DPC buys that are financed by bonds (or bank borrowing for that matter), the more money DPC is losing. The maths is undeniable. For all TUA shares taken out by bank borrowings or bonds, DPC is cashflow and profit negative. Granted, none of this takes into account savings from business integration or future business growth. Over time I am sure that TUA will prove an excellent cash positive investment for DPC. But right at this moment, at the point of takeover, the more shares that DPC buys with debt, the worse the profit outlook for DPC in the short term.

This calculation does not apply if TUA shareholders are paid out in DPC shares. The point is that back on 28th July, Paul Byrnes could not possibly know what proportion of shareholders overall would take DPC shares/DPC Bonds/Cash in what combination. Byrnes has good business sense and no doubt could make an educated guess. But his forecast can't be precise, because Byrnes doesn't know the proportion of TUA shares acquired funded by debt in advance.

The other thing about Byrnes forecast that is odd is that he says the $20m to $25m profit range depends on the ultimate shareholding in Turners. This is odd because if DPC only had a minimal level of acceptance albeit enough to bget them over the line and paid out mostly in shares they would have a higher profit than if DPC acquired 100% of DPC entirely funded by debt. IOW you can't guarantee a higher profit by acquiring more shares.

IMO Byrnes profit forecast of $20-$25m is an educated guess. You shareholders can't hold him to it because there are too many unknowns in how the acquisition ends up being funded.

SNOOPY

[blackcap]

Thanks for this clarification from management Blackcap. The thing that bothers me about this forecast is this.

Based on the two latest half year results for TUA, the annualised profit is:

$2.269m + $2.647m= $4.916m (NPAT)

So annualised NPBT for TUA = $4.916m/0.72 = $6.827m

80% of that figure is: 0.8 x $6.827m= $5.462m.

That 80% is the incremental gain in profit, once the 80% of TUA that DPC didn't own before the takeover is brought in house.

Add this to the $15m for FY2016 that is the DPC forecast for all other parts of Dorchester ("excluding the impact of the takeover offer of Turners" from p24 of the Grant Samuel Evaluation) and I get a forecast NPBT for FY2016 of:

$15m + $5.462m = $20.462m

To make the NPBT $25m upper profit forecast figure post merger, the Turner's profit would have to increase by:

$25m -$20.462m = $4.538m in just 18 months. That would mean the contribution from the Turners profit for the DPC year ended 31st March 2016 would be:

$6.827m + $4.538m = $11.365m

That is an increase in TUA NPBT of: $4.538m/$11.365= 40% (!)

I would be seriously hacked off if TUA directors were projecting that kind of profit increase so soon, yet agreed to sell out to DPC so cheaply.

SNOOPY

One word.. synergies

[noodles]

Basic annualised earnings of TUA are $4.916m (NPAT)
Number of shares in TUA are 27.375m
So eps = $4.916m/ 27.375m = 18.0cps

At a cash share price of $3 (The acquisition price), the net yield is: 18/300= 6%

TUA is issuing bonds to help fund the takeover, and is paying 9.5% interest on those bonds. Therefore the more shares that DPC buys that are financed by bonds (or bank borrowing for that matter), the more money DPC is losing. The maths is undeniable. For all TUA shares taken out by bank borrowings or bonds, DPC is cashflow and profit negative. Granted, none of this takes into account savings from business integration or future business growth. Over time I am sure that TUA will prove an excellent cash positive investment for DPC. But right at this moment, at the point of takeover, the more shares that DPC buys with debt, the worse the profit outlook for DPC in the short term.

This calculation does not apply if TUA shareholders are paid out in DPC shares. The point is that back on 28th July, Paul Byrnes could not possibly know what proportion of shareholders overall would take DPC shares/DPC Bonds/Cash in what combination. Byrnes has good business sense and no doubt could make an educated guess. But his forecast can't be precise, because Byrnes doesn't know the proportion of TUA shares acquired funded by debt in advance.

SNOOPY

Nice try Snoopy. The maths is deniable.

You are comparing pre-tax interest (blend of bank rate and 9%) with post-tax TUA profit.

Of course you are also failing to recognize that TUA will make DPC a lot more than 4.916m (NPAT). (third party costs gone and 11 other cost saving initiatives, new product initiatives, and the 5-10% growth already forecasted by TUA)

Byrnes has also stated that he is pleased with the uptake of holders who want DPC shares and it has exceeded their expectations. So therefore $25mill could be exceeded!

The bonds are simply a mechanism for DPC to keep their tax losses intact and sweeten the deal for TUA income investors.

[Snoopy]

One word.. synergies

Your one word answer will eventually be correct blackcap. But I am surprised these synergies will be so great in just over a year's time. I would expect it to take longer than that to filter out any duplication in the business hierachy. Having said this I see that TUA had 'subcontracted service expense' of $4.627m last financial year. I wonder what that is, or more to the point whether they can save money by bringing the majority of it under the DPC umbrella?

SNOOPY

[noodles]

Takeover complete: 90% reached

Let's move onto the DPC thread

[Snoopy]

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NOTIFICATION OF DOMINANT OWNERSHIP

Dorchester Turners Limited (Dorchester) made a full takeover offer for all of the issued share capital in Turners Group NZ Limited (Turners) dated 18 September 2014 (the Offer).

As at the date of this notice, and as a result of acceptances of the Offer, Dorchester holds or controls 90% or more of the total voting rights in Turners. Accordingly, pursuant to rule 51 of the Takeovers Code, Dorchester gives notice that it has become the dominant owner of Turners.

For and on behalf of
Dorchester Turners Limited

Paul Byrnes
Director

------

SNOOPY

[Snoopy]

Nice try Snoopy. The maths is deniable.

You are comparing pre-tax interest (blend of bank rate and 9%) with post-tax TUA profit.

Noodles, in the general case your comment would be correct. However, in this instance TUA have cleaned out their imputation credit account with the special dividend paid. Even if there was anything left in there it would be wipe dout by the DPC change of control of ownership.

You are no doubt also aware that as at the 31st March 2014 balance date (note 19 in the annual report), DPC had $6.761m in deferred tax assets accumulated from previous losses. DPC expects to recover $3.360m of that over the ensuing 12 months and $3.317m of this in the twelve months after that. This means that DPC will not be paying any (cashflow) tax in FY2015. The tax 'paid' by DPC for FY2015 will be a non cash transaction that reduces the deferred tax asset.

Consequently, I believe my highlighting the cashflow that must be paid out on the 9% (pre tax interest) bonds as money that cannot be offset against new tax deducted from future TUA subsidiary profit (post tax profit) was appropriate. All of that 9% interest is a net loss of cash to DPC. For a finance company that always relies on cashflow, the DPC bonds will cause a real net loss of cash that will crimp the growth of DPC over the next year or two.

SNOOPY

[Snoopy]

Nice try Snoopy. The maths is deniable.

You are comparing pre-tax interest (blend of bank rate and 9%) with post-tax TUA profit.

I want to go back to this because over the last few months of the life of the bonds, the DPC tax credits should run out. So what will happen in this situation? The last documented twelve months for TUA produced the following profit (NPAT):

$2.269m + $2.647m= $4.916m
Number of shares in TUA are 27.375m
So eps = $4.916m/ 27.375m = 18.0cps

Given the $3 per share price that DPC will pay for the remainder of those TUA shares, this means a net yield of:

18/300 = 6%

The interest on the DPC bonds is 9% (9% gross from a bondholder point of view), or 9% x 0.72 = 6.48% (assuming a 28% tax rate) if you use the DPC perspective and adjust for tax deductability.

Borrowing at 6.48% to access an income stream of 6% is a very obvious way to lose money. Of course if the net income at TUA were to grow by (6.48/6=) 8% over the next two years, then the net interest paid would just cover the net income received and the whole thing becomes 'cash neutral' from a DPC perspective. But will the TUA profits grow by that much in two years? I would guess yes (I like the prospects of TUA), but it is certainly not a given.

SNOOPY

[blackcap]

But will the TUA profits grow by that much in two years? I would guess yes (I like the prospects of TUA), but it is certainly not a given.

SNOOPY

Does not matter Snoopy. They are not interested in the "growth" of TUA's profit or at least not paying for it. They are paying for the synergies which will be much more than 2 years interest at 9%. At the AGM I also gleaned that the bonds were a "sweetener" to get Barthel on board. And that in itself was integral in the takeover working.

[Snoopy]

Byrnes has also stated that he is pleased with the uptake of holders who want DPC shares and it has[/COLOR][/COLOR] exceeded their expectations[COLOR=#333333][COLOR=#333333]. So therefore $25mill could be exceeded!

I would guess the effect of having 'more shareholders accept DPC shares than expected' will be largely cancelled out by more bonds being issued to what DPC term their 'committed sharehodlers' and who I term 'the big boys'.

From p31 of the Independent advisers report:

"The number of shares issued to Dorchester's committed shareholders may be impacted by the number of shares issued to Turner's shareholders who accept the Dorchester Offer and the number of Turner's shareholders that elect to direct the special dividend paid by them to Turns to subscribe for shares in the share placemnent (i.e if $25m of shares are issued to Turner's shareholders), Dorchesters committed shareholders would be issued $5m of shares (to make the total up to $30m of new capital) and $5m in Dorchester bonds."

By implication if $30m of new shares are issued to DPC small shareholders, the 'big boys' will get $10m worth of Dorchester 9% bonds!

SNOOPY