The fashion retailer said on Thursday it has acquired full control of PLT for an initial £269.8mln in cash and shares.
Even though the price could possibly rise to £323.8mln, depending on share price performance, it was also a major rebuttal to hedge fund Shadowfall, which on Tuesday predicted the stake could cost £1bn.
Cementing its position as the ‘King of AIM’ and perhaps jabbing another big finger in the eye of short-seller ShadowFall, Boohoo’s shares climbed 18% to 394p by Thursday afternoon as investors and the City gave the deal their approval.
“This is a very shrewd and positive move by Boohoo’s management team that removes one of the major cloud’s that has hung over the equity story,” said analysts at broker Liberum in a note.
The best performing part of the group in recent years, PLT has grown sales at a 111% compound annual growth rate over the past four years and now makes up 42% of Boohoo’s revenues and with almost a 12% EBITDA margin compared to the 10.2% group average.
Taking full ownership of PLT is expected to be significantly earnings enhancing for Boohoo, given that the subsidiary made an after-tax profit of £86mln in the past year to February.
At a multiple of around 11-13 times forecast earnings, the deal values PLT well below Boohoo’s current 27.6x multiple.
Not only that, said the Liberum analysts, the usage of high multiple Boohoo shares to pay for the minority stake means the deal would be 18-20% accretive to the group on a full year basis.
The initial acquisition agreement from 2017 gave Boohoo the right to acquire PLT at the end of the 2022 financial year, “but with early acquisition allows Boohoo to acquire it at a cheaper price than what we estimate could have been between £450-500m based on similar acquisition multiples”.
Estimating the deal values 100% of PLT at a market value of £998-1,225m, but that the group has acquired this stake at a 30% minority discount, suggests to the analysts that £300-367m value has not been paid for and therefore accrues to group shareholders.
For the minority shareholders, Liberum said they would get the advantage of gaining a 2.6% immediate stake, potentially rising to 3.9%, in the bigger Boohoo Group, which could be worth a lot more than their minority stake in PLT in the longer-term.
Liberum upgraded its earnings per share forecasts by 13-14%, lifting its share price target to 490p from 430p.
Boohoo was turning the tables on the rest of the retail sector, if not most of the corporate world, by splashing the cash during lockdown, said analyst Sophie Lund-Yates at Hargreaves Lansdown.
She said that as PLT has been part of boohoo’s story for a while now, integration should be very simple and means the benefits can be reaped quickly.
Lund-Yates was also impressed with Boohoo’s other news that immediately following completion of the acquisition it will still have more than £350mln of net cash.
“These are torrid times for retailers, so news that Boohoo’s net cash position is actually set to rise at the completion of the deal is very welcome.”
Before getting too carried away, she added that there are reasons for caution, with Boohoo’s shares trading on a fairly high valuation, which means there are high hopes for the future.
“International growth is particularly important from here, and it’s likely we’ll see more brands added to Boohoo’s cart in the not-too-distant future that will help bolster this ambition.”
Shadowfall and rise
A day earlier Boohoo had issued a detailed rebuttal to hedge fund Shadowfall, insisting that there was no merit in the hedge-fund’s 53-page report that claimed that Boohoo had over-stated its cash flow because of the minority shareholding in PLT.
The hedge fund also claimed that the company had been misleading investors about its free cashflow for the past six years, including by £32.2 million in the past financial year alone.
In its statement on Wednesday, the retailer admitted that it had changed its accounting policy on the 34% minority stake in PLT, however.