GPG: Under the hammer
Recommendation
Worth more dead than alive, Guinness Peat Group’s board made the laudable decision to sell most of its grab bag of quirky assets and return the proceeds to shareholders.
By the end of it all, shareholders will have 100% ownership of global threads and crafts leader Coats plc, which is fine by us. GPG isn’t a high quality company but we were able to buy it cheaply—see GPG: Profiting from a breakup of 18 Jul 12 (Long Term Buy – $0.36).
With the price up 25% since then, what should members that followed this asset play do now? Let’s first assess how the liquidation is going.
Key Points
- Listed assets have increased in value recently
- On-market buyback is proceeding
- GPG is no longer cheap, Hold
After a strategic review increased the likelihood of divestiture or sale of GPG’s largest equity investment, Tower Limited has risen about 25% in Australian dollar terms. The company’s second largest position—life insurance upstart ClearView—was sold into a takeover offer at an 8% premium to our ‘full market valuation’ and a 50% premium to our ‘discounted market valuation’. So far so good.
Ridley Corp, its third largest holding, is up about 10% since the time of the review in mid-July. A medium size holding, PrimeAg, is itself in liquidation and likely to return more than our July valuation. Fellow corporate farmer Tandou might do likewise.
None of this should be a complete surprise. The potential sale of a strategic block in a company where GPG is one of the largest shareholders will attract suitors. That in itself will provoke a defensive realisation of value processes to fend them off.
So the prospect of a better result than those pencilled into our initial review, especially in regards to the ‘discounted’ valuations for each investment, is high.
GPG will also soon buy back the remaining NZ$350m (£178m) of capital notes, clearing its outstanding debts and paving the way for capital to be returned to shareholders under various guises.
Share buyback
First comes a buyback. The company has increased its current buyback program from £10m to £70m (approximately 15% of its equity base), making the very first repurchases in recent days, although only about $0.5m worth so far. Down the track, one or several cash capital returns are a possibility.
Preparing for life after the partial liquidation, the company has begun to wind down staff numbers and overhead expenses and will soon change its name from GPG to Coats. Everything so far is going according to plan, with more good news on the stock portfolio liquidation front a distinct possibility.
So why has founder Ron Brierley sold more than $2m worth of shares at around the current price, taking his stake from 3.2% to 2.9%? Perhaps with his influence waning he’s decided to reduce his exposure. A more likely explanation is that, like us, he feels GPG stock is no longer a compelling bargain. We recently downgraded to HOLD (see GPG: Interim result 2012 from 30 Aug 12 (Hold – $0.40)), and will be maintaining a close eye on the liquidation process.
Note: The model Growth portfolio owns Guinness Peat Group shares.