Honeycomb to merge with Pollen Street – Honeycomb Investment Trust has announced plans to merge with Pollen Street Capital Holdings, the holding company for its investment manager. This would be the end of Honeycomb as an investment trust as it morphs into a commercial company.
Pollen Street shareholders will end up with about 45.5% of the enlarged share capital. Shareholders in both companies will need to approve the deal, including approval of a waiver of Rule 9 of the City Code on Takeovers and Mergers.
The rationale
The statement lays out a number of reasons why the two companies think that this is a good idea –
- a compelling revenue profile, with an attractive balance of interest income from Honeycomb and recurring fees and fast growth from Pollen Street;
- a multiplier effect on third party Assets Under Management, through funding commitment in new vintages of existing strategies, as well as providing funding to accelerate the launching and seeding of new strategies;
- EPS accretion in the second full year post closing for Honeycomb’s shareholders;
- the potential for significant re-rating and valuation upside;
- possibility for increased liquidity on account of broader expected interest, larger market cap and potential future FTSE 250 inclusion; and
- a differentiated purpose-led asset manager.
The enlarged company will have a similar portfolio – targeting predominantly high quality, diversified and low risk asset based direct lending investments, generating stable returns.
The combined group will be entitled to 25% of the total carried interest entitlement in the most recent flagship private equity and credit funds of Pollen Street, as well as 25% of the total carried interest entitlement in all future funds established by Pollen Street.
Holders of Pollen Street shares will get 29,472,663 new shares, equivalent to 45.53% of the enlarged share capital. Based on the closing price of 967.5p per Honeycomb share on 14 February 2022, the combination values Pollen Street’s entire share capital at approximately £285m.
Honeycomb has obtained irrevocable undertakings from Quilter Investors Limited, CC Beekeeper Ltd (an investment entity affiliated with Capital Constellation LP and managed by Wafra Inc.), Phoenix Insurance Limited and a related party, and Caledonian Consumer Finance Limited to vote in favour of the resolutions required to approve and implement the combination. These irrevocable undertakings represent approximately 47.4% of Honeycomb’s issued share capital as at 14 February 2022.
Add in the votes of various Pollen Street Partners, closely associated people and Honeycomb directors, and the irrevocable undertakings add up to 50.4% of Honeycomb’s issued share capital.
In addition, M&G Investment Management Ltd has provided a letter of intent to vote in favour – that’s another 6.0%.
Subject to the receipt of regulatory clearances and approval by Honeycomb shareholders, the combination is expected to close in the second quarter of 2022.
About Pollen Street
Pollen Street is a multi-asset and multi-strategy asset manager with flagship private equity and credit strategies, and approximately £3.0bn AUM as of 31 December 2021. The founding partners have been working together for over 16 years, and the team consists of more than 70 employees (including over 30 investment professionals). The business has been growing rapidly, with AUM increasing by approximately 50% in 2021.
Pollen Street’s private equity strategy focuses on buy-outs of middle-market companies headquartered in Europe, driving revenue-led growth through a combination of structural market growth drivers and active management. Pollen Street has delivered strong returns with an average 28% gross internal rate of return (IRR) and 2.8x gross multiple on invested capital (MOIC) in Fund I/II and 26 per cent gross IRR and 2.2x gross MOIC in Fund III. The IRR and MOIC figures are based on financial and business services only, up to Q3 2021.
Pollen Street’s credit strategy focuses on providing asset based direct lending to middle market businesses in Europe and the US secured on diverse portfolios of financial and real assets. The strategy is supported by the large and fragmented market which is currently underserved by the banking industry, capital markets and more generalist credit funds creating a favourable investing environment. Pollen Street has invested approximately £2.8bn across 90 deals since 2016, and delivered in excess of 10% gross IRRs from typically senior secured exposures.
Pollen Street’s core strategies provide a clear route for increasing its AUM, and it expects to reach approximately £4bn-£5bn AUM over the next 2-3 years based on existing products, new vintages of existing funds and new funds for which it is already fundraising or in discussion with investors. This growth is expected to be further accelerated by the strategic use of Honeycomb’s balance sheet.
Pollen Street is also well positioned for expansion into other adjacent strategies that would further accelerate its growth, having already established a strong team, track record and sourcing capability through its flagship funds.
[It will be a shame to see Honeycomb leave the sector but the rationale for this makes sense to us and we wish it all the best.]
Update 18 February
[Our thinking on this has changed. First, and please accept our apologies, we missed the dividend cut – dividends will go from 80p to 63p in 2022 and 64p in 2023. We now think that dissenting shareholders should be offered an exit opportunity. Please see our news show for 18 February.]
HONY : Honeycomb to merge with Pollen Street
After having been quite successful as an “execution only” client of a well known large wealth management company, but with a rather modest amount of capital, I fell on my face this week with Honeycomb, losing £3000 in 3 days,and have recently topped up a holding to boot. Unlike all my other choices, many aided by the excellent advice available as a member of Motley Fool, the analyses of “Simply Wall street, reading the Questor column and other like comment, there was zero warning about the possible pitfalls of this merger. Have all these sources deliberately kept mum, or have we all been caught napping together? I can accept that with investments, it’s win some/lose some. But there was absolutely no warning here I would like redress, please, if this can perhaps be achieved by pressure within the industry……or am I out of order here?
It is worth you writing to the chairman. we think you should be offered the chance to cash in your shares at net asset value – £10.30 ish
I hear that even the brokers were out of the loop when the deal was being designed and told 2 weeks prior to announcement, and that was due to someone noting that they had to be told. I too would like to have seen an exit route at NAV less a little, but could not wait as the price started falling due to sellers immediately. I don’t think the board really understand the IT world and don’t expect my letter or anyone else’s will make a blind bit of difference, besides I am now out at a loss for clients. Disgraceful behaviour.
Can anyone explain the deep fall in th. share-price. Is it only. due to the dividend. cut?I rather doubt it because this had been announced previously. I have e-mailed POLN. asking for. the next announcement – NAV or trading update but have not received. a reply I am. also concerned that when the. shares whose. dividend is subject to a dividend waiver until 2024 are subsequently entitled to the. full dividend – will this mean a further. dividend. cut for everyone??.
When this was first announced, I sold my holding based on the prospect of a 20% dividend cut. I got back in at 915p after a while as the dust appeared to have settled. How wrong I was and have seen the drop to its current 550p, where I have upped my investment based on a 64p annual dividend. The share price has fallen, in my view, because, having read the interim accounts and effects of the Combination, it seems that existing shareholders have given 285 million pounds or thereabouts to Pollen Street shareholders in return for a profit after tax of only one million. I have been in touch with Investor Relations at HONY but with no real explanation or apology given. I have just made contact with Quilter to ask if they have any comments or if there were any promises made that have not been publicised. I wonder if any “backroom” deals were done with the shareholders who gave their Irrevocable Undertakings. It seems strange that so many professional investment firms can have been duped in this way. The only hope as I see it is that the promise of EPS growth from year two will be sufficient to maintain the dividend per share currently being paid and that perhaps the share price will recover when the investment world wakes up to the fact that the dividend is really a sustainable 10% plus. Then, perhaps, a share price re-rating.
Following my previous post, it is worth mentioning that, according to what I have read, the Company, POLN, intends to continue meeting the criteria to remain and Investment Trust. I gather that this gives certain tax advantages and is worth keeping.