It's now been six weeks since TPG Group and The Carlyle Group's ('the Consortium') bid for vet retailer Greencross Limited (ASX: GXL). Greencross' share price has been trading around 10% above the Consortium's recent offer of $6.75 per share, and it is uncertain if a higher offer will materialise.
As a result I believe it would be prudent for shareholders to act as though a higher bid won't materialise and consider if they're still happy holding their shares.
The 'Sell' case
Around $7.50 appears to be decent price to get for selling Greencross, roughly the highest shares have traded for in the past 12 months. If you felt that the economy was likely to struggle or that Greencross' competitive position could be eroded, today's prices are a fair exit opportunity.
I intend to continue holding my shares, although should Greencross begin expanding aggressively again or fail to make progress on its cash flow position, I would probably be tipped into the Sell camp.
The 'Hold' case
Greencross' recent interim results were excellent, with strong same-store sales growth, widening gross margin as well as decent cash-flows and improvements on the company's source of funding. Recent co-location initiatives have proved very effective at driving sales, and more same-store sales growth is likely on the cards as new locations mature.
The downside is that sales in Western Australia suffered significantly as a result of economic malaise in that state, while Greencross is also unlikely to continue growing by acquisition, at least in the short term.
Greencross has enough debt funding available to continue co-locating its stores and making the occasional acquisition, but rapid expansion of its store network appears unlikely.
The 'Buy' case
At 22 times earnings and with limited growth by acquisition, Greencross appears to trade around fair value today. That's not to say it won't go on to be a market-beating investment, but the likelihood is lower than it was when shares were below $7. Buying in expectation of a higher bid would also be a mistake, as there's simply no way of knowing if a higher bid will eventuate.
Based on the size of the most recent bid increase, a new bid may also not be any higher than today's prices. For all of these reasons, I consider Greencross to be a 'Hold' today.
