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Morningstar | Navitas Shareholders Receive a Great Offer from BGH Capital and Founder Rod Jones

Much like the KKR offer for MYOB earlier this week, we weren’t particularly surprised by the takeover offer for Navitas from the BGH Consortium, which includes founder Rod Jones, private equity firm BGH Capital, and AustralianSuper. There appears to be a lot of private equity capital chasing ASX-listed companies currently, and inexpensive, defensive, and cash-generative businesses like Navitas suitably fit their requirements. However, unlike the KKR offer, the BGH offer is at a significant premium to our AUD 4.22 fair value estimate.

At this stage, the BGH offer is "preliminary, conditional, and non-binding…" and subject to a range of conditions, such as Navitas achieving its self-imposed financial targets, which we expect to be achieved, and net debt remaining below AUD 191 million in fiscal 2019. However, we think the offer has a strong chance of success particularly as it has the support of founder, Rod Jones. Mr Jones is the largest shareholder, with 13% of the shares, is a director of the company, and was CEO until June this year. This means he has an excellent understanding of the business and strong relationships with employees, not least with his son who leads the SAE division. The combination of Mr Jones’ involvement, the price being offered, and the support from shareholders, representing 18% of the shares, means we expect little opposition from management or alternative bids.

The BGH offer comprises two options, being AUD 5.50 cash per Navitas share, or a combination of AUD 2.75 cash per Navitas share plus one share in a new unlisted company, which will own Navitas, for every two existing Navitas shares. The two options effectively have the same value, but we prefer the simpler all-cash option. Considering the offer is 30% above our fair value, we think it offers good value and have moved our fair value to the offer price to reflect our expectation that the bid will succeed.

Aside from the offer, we continue to believe Navitas will generate mid-single-digit EPS growth over the next decade but that the company is vulnerable to contract losses and technological disruption of the tertiary education sector. We also increasingly believe more investment, innovation, and diversification may be needed to sustain earnings growth. This is more likely to happen under private ownership which would remove the pressure to generate profit growth and pay regular fully franked dividends. We expect private ownership will result in higher financial leverage and the reinvestment of profits, in addition to increased merger and acquisition activity, things which can prove challenging under the existing publicly listed structure.