Nothing divides opinion in the City more than a takeover bid. When the bidder also has a controversial past, the debate becomes even more heated. So it has been in recent days over the proposed acquisition of GoCo, owner of the GoCompare price comparison service, by Future, the magazine publisher.
Questor canvassed opinion about the deal from a number of fund managers and analysts. There was little sign of consensus.
“This deal is less left-field than it initially appeared,” said one fund manager who owns shares in both companies. “There is an awful lot Future can do with GoCo. The bid was a surprise but after we had spoken to Future’s management, we were comfortable with it.”
But another fund manager decided to “short-sell” Future shares after he heard of the takeover. “Nothing about this deal makes any sense,” he said.
“The conference call [with Future’s management] was very odd. Searching for the logic of combining her company with a price comparison outfit, the best defence that Zillah Byng-Thorne [the chief executive] could muster was that GoCo was for sale, also founded by an entrepreneur and handily just down the road in the South of England.”
To be fair to Future, its statement did include rationale such as the scope for “creating a leading global specialist media platform that drives intent”, adding “key capabilities and adjacent routes to monetisation”, and “substantially growing the addressable market”, although this column would have preferred to see more English and less jargon.
Why does Future arouse such strong and conflicting opinions? It is because of its takeover habit.
The firm has grown extremely quickly: when Ms Byng-Thorne took over in 2014, its market value was less than £100m but it was almost £2bn before news of the acquisition sent the share price sliding.
That growth has been driven by repeated acquisitions. Future’s backers say the firm’s record of growth in profits speaks for itself. Its detractors counter that the businesses it acquires do not prosper under its ownership and that the only way to maintain growth is to buy yet more businesses. Sooner or later, they say, the music will stop.
On the whole, Questor regards itself as a takeover sceptic. However, the occasional serial acquirer does make a success of it. RWS, the patents firm tipped here in the past, springs to mind.
Let’s seek some evidence as to Future’s success as a buyer of businesses. We were struck by a quote from the first investor we mentioned.
Referring to Future’s previous acquisition of assets from Centaur, another publisher, he said: “Within no time, Future had made huge amounts from these assets that Centaur hadn’t been able to make for one reason or another. We owned shares in Centaur too and we were staggered by the amount of money that Future was able to make from its former assets.”
He added: “I think Future will make the GoCo purchase work – it has a fantastic record of execution.”
One complaint made by those who dislike repeated acquisitions is that they can make financial results hard to interpret. Like-for-like comparisons become more difficult and there can be acquisition costs, the writing off of associated “goodwill”, and problems with disentangling organic growth from acquired growth.
We will try to look through all that complexity to get a sense of where Future is going. Conveniently, it announced results for the year to September alongside its offer for GoCo. Everything was up: sales by 53pc, operating profits by 90pc, profit before tax by 309pc, cash from operations by 71pc and earnings per share by 388pc.
Now, as Terry Smith, the respected fund manager, has said, it’s easy to grow returns if you deploy more capital. Has Future thrown capital at these returns?
The number of shares in issue has grown this year, but by a relatively modest 16pc, while net debt at the end of the year was 54pc higher than a year previously. Strong cash generation is eating away at these debts. Even when we take that extra capital into account, Future’s growth is impressive.
A good business, then. But a good investment? The shares trade at about 22 times earnings – reasonable for such high growth. But a lot depends on this latest acquisition. A risky buy.
Questor says: speculative buy
Share price at close: £16.80
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