Here's why GUD Holdings Limited is in a trading halt

GUD Holdings Limited (ASX:GUD) has skimped on its duty to retail investors to fund its latest acquisition.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of leading consumer and industrial product company, GUD Holdings Limited (ASX: GUD), were frozen in a trading halt this morning as the group undertakes a distasteful capital raising to fund an acquisition.

In an announcement to the ASX this morning, GUD said it has entered into an agreement to acquire Brown & Watson Pty Ltd (BWI) for $200 million and up to an additional $20 million of earn-outs.

From a strategic perspective the deal makes perfect sense. As GUD chief executive officer Jonathan Ling said, "Established over 60 years ago, BWI is a leading automotive aftermarket business which owns the NARVA and Projecta brands in Australia and New Zealand."

He said BWI will complement GUD's existing automotive business which houses brands such as Ryco, Wesfil and Goss. "BWI, together with our existing GUD Automotive business, will provide GUD with a considerably broader product offering to our customers in the growing automotive aftermarket and specialty segments," Mr Ling said.

According to BWI management, its NARVA brand controls 24% of the lighting and electrical accessories aftermarket which generates roughly 75% of revenues. Meanwhile the Projecta brand has 19% share of the battery maintenance and power products market and accounts for 15% of group revenue.

Following the acquisition, GUD says BWI will contribute $27.9 million to financial year (FY) 2016 earnings before interest and tax (EBIT). In FY15, it'll generate EBIT of $26.6 million on sales of $109 million. The transaction is expected to be mid-teen earnings per share accretive.

Based on anticipated earn outs of $9.1 million, transaction costs of $5.8 million and the $200 million base purchase price, it appears GUD has paid 8.1x forecast FY15 EBIT for BWI.

Raising capital

GUD intends to pay for the acquisition using three sources of capital:

  1. $131.5 million of debt will be drawn from a recently refinanced debt facility (which will raise group debt from $120.4 million to $259.7 million)
  2. An institutional offer of 10.6 million shares at a floor price of $7.00 will raise at least $74.5 million.
  3. Eligible shareholders who were on the company's registry at 7pm (Melbourne time) on 11 May 2015 can take part in a miniscule share purchase plan (SPP) which will raise $15 million. Up to $15,000 worth of shares can be bought at a 2.5% discount to the volume weighted average price (VWAP) up to and including the date the SPP is scheduled to close (5 June 2015).
Source: GUD ASX announcement, 12 May 2015
Source: GUD ASX announcement, 12 May 2015

Should you take part in the capital raising?

I don't follow GUD Holdings particularly closely but there are a few immediate concerns I have with today's announcement.

Firstly, on the face of it, the purchase appears expensive. Although it could be argued GUD shares currently change hands at an enterprise value to EBIT (EV/EBIT) multiple of 21x (based on FY14 annual results), therefore the BWI acquisition will improve intrinsic value; one wonders how many other firms were in the bidding process for BWI and whether a cheaper price could've been attained.

Nonetheless, if management can drive significant synergies out of the business then the price paid will likely prove a fair one.

My second and most important qualm with today's announcement is the disregard for retail shareholders.

Companies frequently palm off retail shareholders by arguing retail placements are too slow or an expensive way to raise capital and therefore raise money through institutions.

The problem with GUD's capital raising is it dilutes retail shareholder ownership. That means, if you're a shareholder reading this, you now own less of a larger company!

Here at The Motley Fool Australia, we've long argued the fair way to raise capital is to undertake a pro-rata renounceable rights issue which enables all shareholders to participate in any capital raising. And, if they can't afford to buy new shares, they can sell their rights.

At the time of its last annual report, GUD's top 20 shareholders had 39.23% of all shares. However there were 12,218 shareholders on the registry.

Remember, as a sharemarket investor, you are a part-owner of a business. If you owned a pizza shop would you let your shop manager dilute your shareholding? I doubt it.

Foolish takeaway

Ultimately, today's announcement represents a good use of funds but showed a distasteful way of raising capital.

Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »