17th May 2022 14:37
(Alliance News) - ContourGlobal PLC on Tuesday accepted a bumper private equity offer from the US, sending its shares soaring in the FTSE 250.
The midcap operator of contracted wholesale power generation businesses jumped 32% in London on Tuesday afternoon to 256.00 pence. Its shares were trading broadly flat in 2022 so far, but are now up 34%.
Cretaceous Bidco Ltd, a newly formed company wholly-owned by New York-based KKR, is offering 263.6 pence in cash per ContourGlobal share.
"Power utility ContourGlobal has hardly blown out the lights since its listing on the London Stock Exchange in November 2017 but a bid from private equity for the power utility offers a reminder of valuable lessons for investors," AJ Bell Investment Director Russ Mould said.
"First, cash flow is king. Second, investing for yield and income can bring its long-term reward to patient portfolio builders. Third, the weak pound continues to draw overseas predators to the London market. Finally, index-linked profits and cash flows are going to look increasingly valuable if inflation proves sticky."
Shareholders also will receive the first-quarter dividend of 4.0128p per share that ContourGlobal has already declared.
The KKR offer gives the company a total enterprise value of about USD6.14 billion, when including debt.
ContourGlobal Chair Craig Huff said the KKR offer will "provide an opportunity for all shareholders to crystallise their investment in ContourGlobal at an attractive price".
The board unanimously recommended the KKR offer to shareholders. KKR also has received acceptance for its offer from ContourGlobal's largest shareholder, Reservoir Capital Group LLC, for its 71.4% stake. In total, KKR said it already has acceptances for the offer representing 72.8% of ContourGlobal shares.
AJ Bell's Mould said: "ContourGlobal floated four-and-a-half years ago at 250p and closed on Monday at 193p. Weak sentiment toward emerging market assets, as the world fell over itself to buy US-listed growth stocks at seemingly any price, did not help.
"The FTSE 250 member's USD3.7 billion debt pile may have put some off, especially at a time when interest rates had started to rise. And stated earnings per share of USD0.12 did not look to cover 2021's USD0.1786 dividend, a figure which management intended to hike by some 10% in 2022."
Mould also pointed to utility's often serving as "bond proxies" in the eyes of investors.
"Bond prices fall as bond yields rise, and utilities may move in sympathy as headline borrowing costs go up. This is partly because the discount rate in capital asset pricing models goes up as interest rates and bond yields go up, so the theoretical net present value of future cash flows goes down, taking the perceived value of the equity down with it," he explained.
Mould noted KKR's interest will have been spiked by ContourGlobal's "fat" yield, "juicy" cash flow, and index-linked nature of its contracts - which has led the private equity firm to snap up ContourGlobal at a "lowly valuation".
"And that lowly valuation was the result of many investors preferring to participate in the dash for growth stocks and more speculative counters in 2019, 2020 and 2021," Mould added.
By Paul McGowan; [email protected]
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