Earlier in the week shares in FTSE 250 stock Equiniti Group (LSE:EQN) jumped 14% after a US private equity firm made an offer. Siris Capital offered around £620m in an all-cash acquisition proposal. This works out at 170p a share. It’s reportedly the fifth time the US firm has made a bid. The share price has now pulled back to just under 162p. So are Equiniti shares undervalued and should I buy?
A FTSE 250 stock battered by Covid-19
Equiniti is an outsourcing business offering a wide range of financial services, one of which is acting as transfer agent. It helps private companies transition to going public via an IPO. Recently, Equiniti helped Dr Martens and Deliveroo do this.
It also handles the dividend payments for most of the constituents in the FTSE 100. That’s great when times are thriving, but 2020 was a particularly challenging year for the group. This is not a surprise, considering the pandemic decimated the finances of many listed companies. In fact, 52 FTSE 100 companies cancelled, cut, or suspended dividend payments last year.
But it’s not just Covid-19 that’s affected the share price. Equiniti bought Wells Fargo’s shareowner services business in 2018. This was to help it advance in the US. But since then, its share price has been in decline. And low interest rates have not helped its profitability.
It’s no surprise private equity firms are taking advantage of the stock market’s 2020 downturn to try to buy quality businesses like this at knockdown prices.
Equiniti’s financials
During 2020, revenues fell 15% and it cancelled its own dividends for the year.
Overall, the Equiniti share price fell 48% in 2020. Despite this, it has some good points and new CEO Paul Lynam is reviewing the business to streamline and improve its future outlook. It has built strong client relationships, which show in its 99% group retention rate. Net debt fell by 10% last year. And new orders improved by 10% year-on-year.
However, the group recorded a loss of £1.7m. Delayed projects and cancelled software sales hit the top line, but cost savings partially offset this. These savings include cancelled pay reviews, frozen hiring, deferred spending, and improved automation.
Year-to-date, the Equiniti share price has enjoyed two big steps up. Between January and early February, it climbed 34%, and it’s now another 8% higher. Both jumps were in reaction to the rumoured Siris Capital takeover.
Will Siris Capital acquire EQN?
Whether Equiniti will accept Siris Capital’s offer remains to be seen. An Equiniti spokesperson confirmed the offer stating it to be a “highly conditional non-binding proposal”. And existing shareholders have been advised to take no action yet. I think this looks to be a stable company going through a bad patch, so if I was a shareholder I’d hang in there either way.
If the deal goes through, then Siris Capital will take the company private, so the most existing shareholders can expect to get is the 170p per share. There’s a clause in Siris Capital’s statement that specifies if Equiniti pay a dividend in the meantime, then this will be deducted from the offer price.
Buying shares below the 170p a share offer price means the company could be considered undervalued if the deal goes through. But if it doesn’t go through, then I expect the share price will fall further. Therefore, I’ll be avoiding this FTSE 250 stock for now.
