I have plans to initiate a position in regard to stocks mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from subscribers to Premium Membership). I have no business relationship with any company whose stock is mentioned in this article.
The investment case for Kingfisher (LSE: KGF) is a pretty simple one.
The issue’s that Kingfisher are facing that has made it unpopular with the investing public are:
- On 3 April 2014, Kingfisher announced that it is in talks with principle shareholders of French home improvement retailer Mr Bricolage SA to acquire their shareholding. Under the terms of the proposed transaction, Kingfisher intends to acquire 41.9% of the share capital of Mr Bricolage from ANPF and 26.2% from the Tabur family at an agreed price of EUR15 ($20.5) per share. Subsequently, the intends to launch a mandatory offer to acquire Mr Bricolage shares held by the minority shareholders at the same price.
- At this level and including the level of Mr Bricolage’s net debt as at Dec. 31, 2013, the overall enterprise value is EUR275 million.
At today’s exchange rates, EUR275 million is about GBP217 million, just under half of Kingfisher’s cash and securities (GBP535 million).
Commenting on the proposed transaction, Sir Ian Cheshire, Kingfisher’s Group Chief Executive, said:
“This would add a third, complementary strong business alongside Kingfisher’s existing two successful brands in France. The retention of Mr Bricolage’s excellent management team within the Kingfisher cadre, the addition to the Group of an established and successful international franchising operation and exposure to new territories makes this an attractive growth opportunity.”
To sweeten the deal for existing shareholders Kingfisher announced a multi-year programme of additional capital returns to shareholders, starting with around GBP200m during the financial year 2014/15 which includes a share buyback program already underway.
This is good news because they are buying back stock at a discount to current earnings and as the share price is falling.
Also a disposal agreed on 24 March 2014 of Kingfisher’s entire 21.2% stake in Hornbach for approximately GBP195m following a review means that the impact on cash is minimal since Kingfisher will be using cash from this sale to purchase Mr Bricolage.
From preliminary results dated 25 March 2014:
“We finish a challenging year in good shape, with our self-help programme meaning we have grown profit and economic return, improved our balance sheet strength whilst also investing in lower prices for our customers and improved convenience. The economic backdrop was generally soft across Europe for much of the year, particularly in France, our most significant market.
“Looking ahead we are well placed to benefit from a pick-up in consumer spending as Europe’s economies return to growth. Our prospects remain bright, giving us confidence to invest in the business and actively manage our portfolio, including expanding into new markets, whilst also commencing a programme of returning surplus capital to our shareholders, alongside the healthy annual dividend.”
– Kingfisher’s Group Chief Executive, Sir Ian Cheshire
Over the past five years Kingfisher have been improving margins, return on equity, return on capital employed and pretty much any valuation ratio you care to consider including balance sheet strength.
I plan to open a position in Kingfisher at the open next Monday 7 July.
EDIT: position opened at 361p
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