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Morningstar | Navitas Likely to Be Privatised Following Higher BGH Offer. FVE Increased to AUD 5.83. See Updated Analyst Note from 14 Jan 2019

We have increased our Navitas fair value estimate to the revised BGH consortium offer price of AUD 5.83 per share as we think there’s a high probability that the offer will proceed following the Navitas board’s decision to allow due diligence and recommend the offer. We were surprised the Navitas board rejected the original AUD 5.50 per share offer last November and expect shareholder pressure has forced a resolution of the impasse. Shareholders were clearly unhappy at the board’s rejection of the original BGH offer, as demonstrated by the 49% shareholder vote against the re-election of chairman Tracey Horton at the annual general meeting last November. Considering around 50% of shareholders reportedly wanted due diligence to proceed last November, that around 90% of the shares are held by just 20 entities, and that the share price has fallen as low as AUD 4.67 since the original offer was rejected, we’re not surprised the revised offer has been recommended.

The offer looks attractive considering it’s 34% above the prebid share price, 19% above yesterday’s closing price, and 14% above our AUD 5.10 standalone fair value, which we increased following the release of extensive and more optimistic earnings guidance following the original offer. The offer implies a fiscal 2019 price/earnings ratio of 27 and dividend yield of 3.2% versus a P/E of 24 and yield of 3.6% at our fair value. We’re not concerned the revised offer is all cash, in contrast to the original offer which had both an all-cash and cash and scrip options, as it still provides an attractive and guaranteed exit price for existing shareholders. Although a timetable is yet to be provided, we expect a vote on the scheme of arrangement around mid-2019. We intend to provide our recommendation on the offer following the release of the scheme booklet, which we expect will be released around April or May 2019.

The board has in hindsight ultimately played its cards well and maximised shareholder value. The revised offer also allows BGH consortium members, including Navitas founder and ex-managing director Rod Jones and AustralianSuper, to vote in favour of an alternative superior proposal should it materialise. This creates the potential for a bidding war, although we doubt an alternative bidder will emerge considering no other offers have been made since the process began, and the BGH consortium’s agreement to this concession implies shareholders are already getting a good price. The BGH offer also has an exclusivity period which restricts Navitas from seeking other bids or allowing due-diligence access to other bidders until BGH’s due-diligence is completed on Feb. 18, 2019.

We think there’s a low probability that the offer price will be lowered, as happened with KKR’s recent offer for MYOB, despite it being indicative, preliminary, nonbinding, and conditional. We expect Rod Jones knows the company sufficiently well to avoid the emergence of unknown problems via due-diligence. Mr Jones founded the business, is its largest shareholder, was managing director until mid-2018, was a board member until late 2018, and his son leads one of Navitas’ three divisions. KKR’s offer for MYOB was also impacted by a general deterioration in technology stock sentiment and valuations which we don’t expect to happen in the relatively stable higher education sector.