Help - UNCONDITIONAL RECOMMENDED CASH OFFER

This is the text of an interesting article from today's Phoenix magazine.



ABBEY’S MARKET EXIT LONG OVERDUE
Date: January 14, 2021 - Moneybags

Charlie Gallagher
Charlie Gallagher


THE INEVITABLE takeout of Charlie Gallagher’s Abbey plc house-building group by the Gallagher family is, like Anne Heraty’s CPL (bought out by the Japanese Outsourcing Inc), another example of a family-dominated business exiting the stock exchange. There are a number of similar characteristics associated with the two entities, including a strong liquidity preference that has limited the growth of both businesses as well as a failure to adapt to the business cycle. For the independent shareholders, the Abbey offer should be grabbed with both hands.

Charlie Gallagher’s talent in the UK and Irish spec-housing market was curtailed by tying up €40m in the running of a low-margin plant hire operation. Matters were not helped by the fact that Gallagher is both chairman and CEO, which represents a breach of listed company corporate governance guidelines. A strong independent chair might, for example, have put a stop to the move into the Czech house-building business in Prague given the complexities associated with operating there. For Abbey, a futher €20m has been outlaid there.

Like Heraty in CPL he missed out on a golden opportunity to hugely expand Abbey’s operation when presented with the ideal economic opportunity (despite having seen his late father survive the 1989 housing crash). Abbey had €100m cash in the bank at the nadir of the last crash, in 2009, which could have been used to buy thousands of acres of housing development land in the greater Dublin region at bargain-basement prices.

Gallagher has probably invested more energy in seeking to get 100% control of Abbey through a series of measures. At least this removes the confusion long associated with the Abbey/Gallagher family nexus, in which two almost identical companies – one the public Abbey vehicle and the other the private Gallagher family company, Matthew Homes – compete with each other when operating in the greater London region.

ABBEY

Without a clear stated conflict of interest resolution policy, observers are left in the dark about the process adopted when, for example, the Gallaghers decide which of the two companies should buy a particular housing site. Charlie Gallagher has maintained that both companies operate fairly and freely and without prejudice to either, but the modus operandi is a mystery.

A relevant comparison might be Noel Smyth’s former property group, Dunloe, where he adopted a strict conflict of interest resolution policy. Any site or property opportunity that the directors came across involving an investment of more than €250,000 had to be first offered to the publicly quoted Dunloe vehicle.

The other area for potential conflicts of interest between the Gallagher family and Abbey is in their respective London region plant hire operations – Abbey’s M&J Engineers and the family’s Charles Wilson Engineers (CWE). In the latter company, Charlie Gallagher’s younger brother, David, is CEO while also sitting on the board of Abbey. (Charlie Gallagher is also a director of CWE.)

When an opportunity arises to open a new plant hire depot, it remains unclear which company gets preference or how the decision is made. When it comes to hiring plant, on what basis does Abbey’s London house-building operation choose to use M&J or CWE and, likewise, how does Matthew Homes make its decision when hiring plant. Clearly these are not questions that concerned the stock exchange regulators.

It is hard to understand why Charlie Gallagher didn’t simply merge the family-owned Matthew Homes and CWE into the Abbey group, thus eliminating the potential for conflicts of interest between the family and the public companies. Such a move would also have achieved significant savings by eliminating the duplication of functions while also giving the merged group greater market status and scale.

The last time Gallagher pushed the family into mandatory bid territory was back in 2012 when Gallagher Holdings Ltd (GHL) bought shares on the market at €5.30 a share to push the family’s holding over 50%, which meant that the family was forced to make a mandatory bid at least at the same level to all the outsider shareholders. At the time, Moneybags estimated that the shares were worth at least double the €5.30 price. Charlie Gallagher/GHL went into the market and bought a further 20% at €5.30 to bring the total family shareholding up from 51.6% to 73%.

Gallagher continued to push up the family’s control, step by step, without prompting a further mandatory offer, moving to 82% in 2019 and to 94% last year. The stock market rules allow for ‘creeping’ control like this, even though it is hard to see how it can be anything but negative for the dependent outside shareholders.

One of the key motivating factors for a controlling family increasing that control would be to influence the way the company is run and, in particular, what it does with surplus cash like the €100m it was sitting on in 2019. An appropriate strategy to benefit independent shareholders would be to pay out this surplus cash, given that Abbey is a highly profitable company with no need to hold surplus money. It has €300m stock in lands and partly built houses, and is creating significant cash flow. Moreover, holding cash in today’s money market where the 3 month Eurobond interest rate is trading at a negative 0.5% interest rate does not make sense and is almost totally discounted by the market.

In 2012, when GHL went over 50%, the independent directors noted that the family “can control appointments to the board and is certain of being able to carry or block all other ordinary resolutions, as well as being able to block, and have significant influence on the outcome of, all special resolutions proposed for approval”. This was the case anyway when the family’s shareholding went over 25% a decade earlier, but presumably helped encourage shareholders to accept the mandatory offer. The directors went on to add, “There can be no absolute certainty that Abbey’s stock or exchange listing can be maintained”.

David Gallagher
David Gallagher

Independent
The so-called independent directors at Abbey are Mick McNulty, the former senior partner of Abbey’s auditors, Ernst & Young; Bobby Kennedy, an ex-Abbey employee who previously ran the compay’s M&J Engineers plant hire division; Lorenzo Fraquelli, CEO of Abbey’s UK house-building operations; Nick Collins, CEO of Abbey’s Irish Kingscroft Developments business; and David Gallagher, who runs CWE. Charlie Gallagher’s niece, Avril Gallagher, was co-opted onto the board in 2019.

At the time, Abbey advised, “The board seeks external advice on significant matters … the group’s NOMAD was consulted on the appointment of Avril Gallagher”. Davys is the NOMAD but Charlie Gallagher did not state what this advice was and it would be surprising if Davys did not question the appointment of another family member.

Ahead of the current offer, the Gallaghers paid €17, the highest price the shares have ever reached, for an additional 2%. Now the remaining shareholders (4%) are being offered the same €17 (a total of €16m), which values the company at €350m. This is the minimum price that could be offered given that under stock exchange regulations the shareholders must be offered the highest price paid over the previous 12 months in any takeover offer. Davy Corporate Finance has noted that the offer has “taken into account the commercial assessment of the Independent Committee”. But, how could Davy offer truly independent outside advice if it is taking into account the assessment of the Independent Committee which, in turn, is taking Davy’s advice.

The members of the Independent Committee could not include the three Gallaghers or its two current employee board members, leaving Tony Quirke, an ex-director of Abbey’s UK stockbrokers, Arden Partners, Mick McNulty and Bobby Kennedy.

In recommending acceptance of the offer, the Independent Committee advised that GHL “intends to exercise its voting rights to ensure the cancellation of the trading of the shares on the market … the effect of which would be to further negatively impact the ability for shareholders to trade and realise value from their holding of shares”.

From a trading point of view, Abbey’s net profits fell at the end of April 2020 by 39% to €26m, while its UK house sales were down 20% to 405, given the fall-off at the latter end of last year. Meanwhile, Irish sales came to a mere 57 houses, a very low number when you consider that Cairn Homes, formed in 2015, built more than 1,000 houses in the same period. Abbey clearly missed the opportunity for significant growth here by sitting on its cash hoard rather than buying sites during the crash.

With earnings of €1.25 a share, Abbey’s shares are probably only worth €12.50 based on a p/e multiple of 10. Adding in the €100m cash pushes the share to €17 at best, so shareholders should simply accept the current offer and be thankful for the escape route.

Reference the Market Abuse Regulations 2005, nothing published by Moneybags in this section is to be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.



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skitzyspider wrote: »

Thank you for posting the article from Phoenix magazine for me. The offer letter I linked above arrived in the post last week and the postage date was 22nd December. The offer on the table is disappointing. I have a little over 2,000 shares but to tell you the truth, I don’t really know much at all when it comes to shares! I’m just trying to figure out would I be better accepting the offer now or if I don’t accept what will happen to the shares if I want to cash out further down the line? I’d really appreciate it if you could give me any advice.

I had a chat with a guy from Davy and he told me to accept the offer or you will be the owner of shares in a non publicly traded company ...the only way to sell out then will be to negotiate directly with the company. Soo I accepted the offer.


I got paid last night for my Abbey shares from the offer.

£15.75 per share, it actually worked out a bit better than when we were posting last as the GBP strengthened a few % against the Euro.

I got just over €18.39 per share, an exchange rate of just about 1.168 euro to the pound.


I originally bought the Abbey shares a couple of years ago at €14...also got a few % dividends in the meantime.

Listen, its not earth shattering but in these uncertain times for Stock Markets a total return of about 35% from my investment is probably ok.