WAM Capital (WAM), Westoz Investment Company (WIC) and Ozgrowth (OZG) previously announced a series of non-inter-conditional transactions, set to merge the three entities in a combined business arrangement, under which it is proposed that WAM will acquire the remaining share capital in WIC and OZG that it does not already own. Separate Scheme Booklets were distributed to shareholders earlier on in the week, with the Schemes to be virtually convened on 4 April.
Shareholders will receive a number of new WAM shares, with the calculations being a function of the ratio between the one-day VWAP for WAM and the underlying NTA before current and deferred tax balances, for either WIC or OZG, plus a 7.5% margin. The Scrip consideration and value will fluctuate based on these inputs until the 31 March Calculation Date, however we see immediate value today, particularly in the larger and more liquid WIC, trading at an indicative discount of 3.2% to the NTA before deferred tax liabilities.
Clients may wonder why the continual corporate activity through WAM, and herein we provide some comments as to why this may be the case both now and moving forwards as the sector consolidates:
- The transactions are in accordance with the Investment Manager’s Strategy, being twofold, which intertwines their approach to acquiring undervalued Australian growth companies, which is further supplemented by the identification of value arbitrage and market mispricing opportunities. On look-through, the underlying listed resources companies that constitute the assets for WIC and OZG also share a similar mandate overlap (smaller end of the market, Australian domiciled growth) while being able to be acquired at effectively under fair value.
- We estimate an aggregate NTA uplift of 1.5% on a diluted basis should the transactions proceed and become effective, of which it seems highly likely. The Schemes will only fall through should the WAM premium fall out of the 12.5-25.0% range and the NTA for either acquirer drop by 10% since the announcement back on 22 December 2021. We would contend that this services the portfolio nicely, adding a alternate and diversified source of value-add, and not exclusively relying on market beta, justifying the indirect price tag on this Fund.
- The acquisitions are highly leveraged to the sustainable premium on WAM, which in and of itself can substantiate such accretive transactions. Through the process of offering scrip over cash, it is essentially a communal win-win as WAM shareholders benefit, even on a diluted basis, on positive portfolio performance, while WIC and OZG shareholders may realise their investments at above NTA, benefit from superior liquidity, or maintain their investments in what is now a very stable register within the third largest LIC on the Australian market.
- While not accounted for in our estimated figures for accretion, as NTA does not encompass imputation credits, franking from balance sheet on either WIC or OZG would add an assumed $0.04 per share in aggregate for WAM shareholder on a diluted basis.
- WAM Strategic Value (WAR) is constrained by its Investment Mandate, discount to NTA, shorter maturity and lower assets under management. The Fund would not seek to absorb investment assets, but rather acquire the disadvantaged company and seek to trigger catalysts, so as to bring about par value and a return to shareholders.
- This way of operating may take a long time to change. WAA issued bonus options at nil cost for shareholders on a one-for-one basis back in March 2021, due to expire in the year. The market cap is currently ~$77m.
- Additionally there is a unanimous recommendation by both the WIC and OZG Directors, with the conclusion reached by the Independent Expert also considering the Schemes to be fair and reasonable, and therefore also in the best interests of shareholders in the absence of a superior proposal.
Bell Potter’s Indicative NTA tracks the ‘indicative’ movement of a LIC’s underlying NTA each month by monitoring the percentage movements of the disclosed holdings and using an index to track the movement of the remaining positions. The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.
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