Wednesday, August 14th, 2019
Creative production and marketing services company Wellcom (ASX:WLL) kicked off the August reporting season with a gift for shareholders, announcing on 31 July that it had entered into a Scheme Implementation Agreement under which it will be acquired by Korean advertising agency, Innocean.
The acquisition, yet to be approved by shareholders, is at $6.70 per share. This represents a 28 per cent premium to previous close. There are also additional dividends totalling 21 cents per share to be paid on or before implementation of the Scheme, including a special dividend of 10 cents per share and a final dividend of up to 11 cents per share.
The deal looks highly certain to be approved. Directors unanimously recommended shareholders vote in favour of the Scheme, in the absence of a superior proposal. Company insiders own almost 47 percent of the business.
As per the announcement, dividends will be franked to the maximum extent possible. Franking will depend on Australian segment earnings for fiscal year 2019, however on our estimates the dividends will be close to fully franked. For income hunters the dividends offer a 3.1 percent yield at the prevailing share price, before franking – not bad considering a holding period of a few months.
In our view, the pending acquisition will be a good outcome for all Wellcom stakeholders, including shareholders, clients, and staff. The structure of the deal, which considered both business continuity and shareholders, speaks to the quality of Wellcom’s management team.
A key positive contributor to Clime’s proprietary Quality Score ranking of companies in which we invest is companies that are led by owner-managers. Our experience is that these outperform those that aren’t, as ’skin in the game’ helps to align the interests of management with shareholders.
In Wellcom’s case this is reflected in a solid track record of organic and acquisitive growth and a steadily growing dividend stream; all the while maintaining a conservative balance sheet.
With WLL set to depart the ASX, we will soon redeploy the returned capital into businesses of comparable quality – not an easy task. Not that we are complaining, as the acquisition price was slightly above our $6.60 valuation, representing a great return for Clime investors. Nonetheless, at current prices an arbitrage opportunity remains.