M&G Investment Management Limited (“MAGIM”), on behalf of one of its managed funds, M&G Specialty Finance Fund (£) SCSp says that it has made several approaches to the board of UK Mortgages Limited with a view to making a recommended cash offer, all of which have been rejected.
The most recent approach was made on 15 July 2020, and proposed a cash offer at 67 pence per UKML share. This values the existing issued share capital of UKML at approximately £183 million and represents:
- a 15% discount to the estimated NAV
- a 21% premium to the UKML closing share price of 55.5 pence as of 17 July 2020;
- a 29% premium over the 1 month volume weighted average price (VWAP) of 52 pence per share; and
- a 36% premium over the 3 month VWAP of 49.4 pence per share (in each case, over the relevant period ending 17 July 2020) (the “Proposal”).
Under the Proposal, UKML shareholders are also entitled to receive and retain the 0.375p/share dividend for the fourth quarter.
UK Mortgages board not talking
MAGIM says that the UKML board has rejected all proposals to date and declined to enter into discussions which might allow it to proceed to a firm offer. MAGIM says it still hopes to secure a recommended transaction. By publishing details of the Proposal, it hopes to kick start a dialogue with shareholders.
Rationale
There is a fit between UKML’s portfolio and the assets that M&G’s fund invests in. MAGIM thinks UKML has consistently struggled to deliver the returns and dividend levels targeted at its initial public offering in 2015. It cites the recent dividend cut as evidence of this.
It also says that “Despite the recent delayed refinancing of Oat Hill No.1, the company clearly continues to experience significant headwinds as evidenced by the materially higher realised funding cost and asset quality concerns, particularly as a result of the government’s payment holiday scheme and subsequent extension. The volatility in the residential mortgage backed security markets and the deteriorating macroeconomic impact on asset quality are expected to continue to put pressure on the company’s long-term performance. MAGIM also believes that the impact of widening credit spreads and the weakening performance of UKML’s underlying assets is not reflected in the company’s reported monthly NAV, given the accounting basis on which it is calculated, which makes it an inaccurate representation of the company’s true value.”
Readers might reasonably wonder what the attraction is for MAGIM if UKML’s 79p NAV is ‘inaccurate’. Presumably, it thinks the NAV is still well north of its 67p offer price.
Pre-conditions to a potential firm offer
The announcement of any formal offer for UKML under the Takeover Code would be conditional on, amongst other things, satisfactory completion of diligence and the unanimous and unqualified recommendation by the UKML board.
As usual the statement gives MAGIM some wriggle room if circumstances change. The ‘put up or shut up’ date by when the offer must be made is 5.00 p.m. on 17 August 2020. A further announcement will be made as appropriate.
About M&G Specialty Finance Fund (£) SCSp
M&G Specialty Finance Fund (£) SCSp (“SFF”) is managed by M&G Investment Management Limited (MAGIM). SFF was launched in early 2018 to allow institutional private credit clients to gain investment exposure to pools of mortgages and consumer credit.