Yesterday, Computershare Ltd [ASX:CPU] made headlines for a huge takeover proposal. Entering into an agreement to acquire Wells Fargo Corporate Trust Services.
What this means is that Computershare will gain control of a massive cohort of managed trusts. From which they can derive income from the many fees and charges associated in handling this money for said trustees.
More importantly, it will push Computershare into a top four spot in the US corporate trust market. Lifting their market share and improving their standings in this lucrative and competitive sector.
All of which no doubt sounds fantastic.
But with a price tag of US$750 million, does this takeover present good value for investors?
A costly acquisition
At face value, like most takeovers, this deal is likely to be met with optimism.
A chance for Computershare to not only snap up a profitable venture, but also expand its competitive offering in the highly lucrative US market.
Management even boasts that the deal will boost earnings per share by 15%, on an accretive basis when including all synergies. And, by FY25, they expect the growth and savings of this acquisition to deliver a 15% or greater return on invested capital (ROIC).
Which again, all sounds good at face value, but will it translate to positive share price returns?
Well, sadly no one will know that until we actually see how this takeover goes. With the potential for a seamless merger, or possibly something far uglier.
It is always hard to tell when dealing with large deals of this kind.
What we can say though, is that Computershare is digging deep to get this deal done. Because as further details show, management is planning on requiring closer to US$1 billion to get this deal done. Planning for additional transaction, capex, and regulatory costs.
In order to pay for all this, the company will use a mix of equity and debt. Relying on US$372 million in a new loan facility. As well as a US$634 million capital raising.
The terms of said capital raising will allow existing shareholders to buy one new share for every 8.8 shares they own. Priced at $13.55 each, which is a 9.6% discount on their currently halted share price of $14.99.
CPU share price outlook
So, current investors will need to decide whether they want to double down for this deal or not. One that represents a fairly large cost for what could be a risky takeover.
After all, if you’re looking for growth, there are far better stocks with higher ROIC multiples.
Especially when you consider the fact that this deal hasn’t budged management’s lower EPS guidance for FY21. Expected to be down 8% on a pre-entitlement offer basis.
Therefore, investors will want to think carefully about whether they’re in this trade for the long term.
Because as far as all signs suggest, this deal will take some time to pay off — if it does at all.
Morningstar analyst Gareth James told the Australian Financial Review that the biggest risk posed by the Wells Fargo CTS deal was integrating such a large business.
Mr James stated that ‘there’s a lot of academic evidence that shows large cap acquisitions often destroy shareholder value.’
However, Mr James believes this is less of a concern for Computershare due to the company being a global business…
‘They’ve always been acquiring big businesses and integrating them and there are always the same challenges they face.’
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For Money Morning