As holders of RCG Corporation Limited (ASX: RCG) will have noticed, the company's shares have rocketed up by nearly 50% since it announced its proposed takeover of private company Accent Group Limited (AGL), a competitor in the retail shoes environment as well as a wholesaler of popular shoe brands.
Seeing that sort of capital appreciation is likely to cause some investors to put their finger on the sell trigger in anticipation of a nice fat profit and in fear of missing out if the price drops back down as the acquisition is bedded down.
Current holders (as of 18 March), will get the opportunity to participate in the share purchase plan (SPP), so they could apply for up to $15,000 worth of shares at no more than 70 cents per share. Given the market response to the takeover, it's likely the SPP will be scaled back.
Even so, holders could sell, take a very healthy profit, and then re-enter with whatever they were allocated in the SPP at a significant discount to the current price.
What are shares in RCG Corporation likely to trade at after the merger with AGL? We have some information to base an informed estimate on thanks to the details in the notice to the market from RCG, which includes basic information about the financial statement for last year for AGL.
I ran a quick analysis of the free cash flow to equity (FCF/E), and then did a discounted cash flow on the FCF/E to arrive at a valuation for the consolidated operation. It's based on 2014 data and allows nothing for any synergies or efficiency gains. It also makes some assumptions about data that is not fully available at this time.
I ended up with a valuation of around $1.50. Even with an increased margin of safety for the 'fuzziness' of the data, it implies that fair value is still well north of the current price of $1.12 and current shareholders might be better off continuing to hold, and taking up the SPP.
I never like to rely on single metrics for a valuation, so a glance over some of the other metrics tell me that the earnings to equity value (EV/E ) will be about 20 – which is around the market average. It's a metric I prefer to the more common price-to-earnings ratio (P/E) as an indication of relative financial health and value. The price-to-sales ratio is also healthy as is the market-to-book ratio.
The P/E ratio will be on the higher side, at about 16.7, but it's worth remembering the earnings this is based on seem very conservative and earnings growth should quickly pull this back.
All in all this does seem to be a well timed and managed move by RCG and the company should continue to reward holders with growth as well as yield.
