Lancaster Investment Management has written to Alison Platt, Chair of Hargreaves Lansdown PLC (LON:HL), regarding the Consortium’s latest offer for HL.
Recall that on 18 June 2024, Hargreaves Lansdown confirmed that it had received a further non-binding proposal from a consortium consisting of CVC Advisers Limited, Nordic Capital XI Delta, SCSP (acting through the general partner Nordic Capital XI Delta GP SARL), and Platinum Ivy B 2018 RSC Limited, a wholly-owned subsidiary of Abu Dhabi Investment Authority (“ADIA”) which manages ADIA’s Private Equities investment division.
The Consortium proposes to acquire Hargreaves Lansdown at a price of 1,140p per Hargreaves Lansdown share in cashof which 30p is a final FY2024 dividend, with an option for Hargreaves Lansdown shareholders to elect alternative conversion equity in respect of some or all of their Hargreaves Lansdown shares.
The board decided to cooperate with the Consortium and provide affirmative due diligence access.
Lancaster Investment Management wrote a letter to raise its concerns.
In summary, Lancaster Investment Management’s Global Equity Funds are investors and supporters of HL, with their interest representing c. 1.9 million shares. Lancaster’s made an initial investment earlier this year and has been building its position ever since.
Lancaster Investment Management reports:
“Regarding this offer, we question: first, the valuation of the offer. Second, the Board’s assessment of HL’s weak historical operating performance versus HL’s potential for strong future growth. and third risk of potential conflict of interest with the terms of the current offer.
We question the fairness of an arrangement where we expect that only a small number of shareholders will be able to remain invested through a private “conversion equity swap”, while we expect that the majority of shareholders, including Lancaster’s Global Equity Funds, will not be able to join with private’.
Lancaster Investment Management says the offer is undervalued compared to listed companies and HL’s trading history.
1140p (including the final dividend) represents an earnings per share multiple of around 17x on the calculation, which is around a -14% discount to AJ Bell’s multiple, as its closest listed peer, is currently valued at around 20x earnings per share. is c.-40% below HL’s own 10-year average PE multiple of 28x. HL only maintained a lower multiple than the bid implied for a brief period during the 2008-09 ‘Global Financial Crisis’ and in the last c. two years, from early 2022, when Lancaster’s would support HL’s problems combined with global geopolitical and macroeconomic turmoil to impact valuation manifold.
Lancaster Investment Management supports:
“It is not enough in our view to simply argue that HL’s recent problems make the valuation history and comparison less relevant to an offer today, which is worth crystallizing the lower multiple for shareholders today. We agree with you that there is good momentum in the operational recovery of the business. However, we see the multiple as a reflection of recent years rather than the future.
AJ Bell and other peers have clearly seen more growth than HL in recent years. However, we would argue that HL has advantages that should be weighed against it when considering a multiple valuation. For example, HL is the UK’s largest platform by assets under management (AUA). has the largest customer base. it has the longest history and the most well-known and powerful brand.”
In Lancaster’s view, HL’s problem areas are within the limits of acceptable risk for an industry-leading, publicly traded company: technology, marketing, customer experience in particular.
Lancaster Investment Management argues that the Capital Markets Day Plan (CMD, 22 February 2022) together with management’s current strategy have already invested in addressing these issues.
You can find the full letter here.