TalkTalk - one-and-a-half good reasons for a buyout
Analysis09 JUL 2018
Analysts from Dealreporter, Mergermarket’s sister publication, pick out pre-event ideas by combing through transcripts, stock exchange filings, analyst reports and news stories. This raw data is combined with proprietary insights and commentary to produce an exclusive report that offers short and long-term ideas (No investment action should be taken without further investigation). If you have any ideas for coverage please email europeflash@acuris.com
TalkTalk [LON:TALK] shares are down around 50% since the Flash weighed up its takeover appeal back in March 2017.
Deal prospects looked decidedly shaky back then: possible bidders already had ample opportunity to move and had not done so. Today, cheaper in absolute terms, and with shareholder changes appearing to raise buyout prospects, TalkTalk has at least one-and-a-half of the key ingredients for a successful pre-event trade.
Takeover speculation around TalkTalk makes most sense in the light of stake-building from activist Toscafund, along with a concentrated shareholder register which includes co-founder and executive chairman Charles Dunstone at 28.5%.
Toscafund now has 16.2% of the business after upping its stake on 3 July, while Dunstone has 28.6% and David Ross, another co-founder, owns a further 11.6%.
Mechanics of a buyout are difficult to weigh, though there are options aplenty. Toscafund itself has participated in listed company buyouts before, notably a GBP 500m deal to delist Daisy as part of a consortium which funded a management buyout. It’s possible that Toscafund is looking for a similar play as it seeks an exit from Daisy with what media reports indicate could be outsized returns.
TalkTalk already has a talented and experienced management team in place that might fancy its chances of creating a similar valuation uplift. But Toscafund’s earlier deal for Daisy was controversial: a "take-under" which was completed at a 1% discount to the target’s stock price a month earlier.
Other possibly interested strategics previously highlighted by the Flash included Vodafone [LON:VOD], Telefonica [BME:TEF] and Iliad[EPA:ILD].
Change on TalkTalk's shareholder register indicates a transaction could be nearing; change in the company's stock market valuation paints a more nuanced picture.
TalkTalk is now cheaper in absolute terms after its stock price plunge but valuation metrics have actually worsened over the past year.
The company trades at 8.7x EBITDA, which is more expensive than the 8.1x it traded at a year ago, even after a 50% decline in its equity price.
Drivers of this include new equity, totalling GBP 200m, which was raised in February via a placing in which all of Toscafund’s top shareholders participated. Debt still comprises a sizeable portion of TalkTalk’s overall capital structure so enterprise value has declined by something closer to a fifth.
And EBITDA has also declined, by 35% in the 12 months to 31 March. As both sides of the EV/EBITDA equation have been compressed, TalkTalk’s valuation multiple has actually increased despite a decline in its enterprise value.
Still, TalkTalk is cheaper in absolute terms at an enterprise value of GBP 2.0bn versus GBP 2.5bn a year ago. It was not a particularly large target relative to the size of potential strategic suitors to begin with. And it’s in the sweet spot for some private equity funds. Daisy's delisting was executed at 1.6x sales and 10.0x EBITDA, though it operates in the business-to-business rather than consumer telecoms services market.
Developments over the past year in TalkTalk’s shareholder register, and its valuation, mean these are all factors worth paying attention to.