Chrysalis (CHRY) has signed a definitive agreement with Visa to sell Featurespace “for an undisclosed sum”. However, Chrysalis expects to receive cash proceeds of approximately £89m (gross of deferred payments, typical of this type of transaction; initial consideration is expected to be approximately £79 million), which represent a 20% premium (equating to an NAV uplift of 2.5p per share) to CHRY’s carrying value of Featurespace of £74.2m as of 30 June 2024. The transaction is subject to customary closing conditions, including the receipt of applicable regulatory approvals.

CHRY first invested in Featurespace in May 2020, with a capital injection of £20m. It subsequently increased its position with secondary share purchases over 2021 (totalling approximately £4.5m) and a follow-on capital injection of £5m million was provided in July 2022, summing to a total investment of £29.5m. As such, the gross proceeds represent a money multiple return of 3.0 times.

Liquidity position

As at 25 September 2024, CHRY had liquid assets of approximately £47m, made up of £45m of cash and a position in Wise worth £2m. Following the announcement on 25 September of the debt facility of £70m, this is expected to rise to approximately £116 million (net of facility fees). CHRY says that the receipt of the initial consideration in relation to the sale of Featurespace should increase the value of its liquid assets to approximately £195m, which would equate to approximately 38% of the company’s market capitalisation, as of 25 September 2024.

Share buybacks – initial allocation of £40m

Separately, CHRY has announced that it will be using some of this liquidity to finance a programme of share repurchases. Under its capital allocation policy, CHRY’s investment adviser recommended a ‘buffer requirement’ to cover working capital and follow-on investment requirements, which the board and investment adviser currently believe is appropriately set at approximately £50m. CHRY views the Barclays facility as covering the buffer, which means that it is now in a position to enact the second pillar of its capital allocation policy, initially via the launch of a share buyback programme of up to £40m, representing approximately 8% of the company’s current market capitalisation.

The initial buyback allocation of £40m represents the majority of the initial Graphcore proceeds received from the disposal announced on 12 July 2024 (£43.8m). Following the Featurespace announcement today, CHRY’s investment adviser says that it expects to track progress towards satisfying closing conditions and thus advise the board on when it might be appropriate to return further capital to shareholders.

In the meantime, CHRY has engaged its joint corporate brokers, Deutsche Numis and Panmure Liberum, to implement the share buyback programme on its behalf over time. The maximum price payable for a share will be an amount equal to the higher of:

• 105 per cent. of the average market value of the company’s shares for the five business days immediately preceding the day on which such share is contracted to be purchased; and
• the higher of the price of the last independent trade and the highest current independent bid on the LSE.

The company intends that the repurchased shares will be held in Treasury.

Comments from Nick Williamson and Richard Watts on the sale of Featurespace

“Featurespace has been an excellent investment for Chrysalis, and we congratulate Martina King, Dave Excell and team on today’s announcement. In many ways, Featurespace has been an exemplar of the type of investment we are looking for and we believe its purchase by a company such as Visa demonstrates recognition of the value that has been accruing from this business model.

“The value of Featurespace has risen over the last few quarters, driven by the good performance of the company and the improving valuations of comparable listed peers; this disposal process has provided additional information about possible value. Since September 2023, the market value underpinning Featurespace’s valuation in the Company’s portfolio has risen by 72% to June 2024; this transaction would imply an exit valuation 109% higher than that of September 2023.

“This sale will also transform the liquidity position of Chrysalis on completion and has allowed the Board to instigate the second pillar of the Capital Allocation Policy, namely the return of up to £100 million to shareholders.”

Comments from Nick Williamson and Richard Watts on the share buyback programme

“Following the signing of the debt facility with Barclays, we are delighted that Visa has signed a definitive agreement to buy Featurespace. Assuming completion, the combination of these two events will raise significant liquidity; this has allowed the Company to begin the process of returning up to £100 million of capital to shareholders.

“We have discussed with the Board how best to proceed in this regard, and believe using the capital that will be available shortly, namely current liquidity and facility proceeds, enables a good start to be made towards this goal. As we get more visibility over the closing of the Featurespace process, we hope that this will enable further capital to be returned. We view the Company’s shares, which currently trade on a circa 40% discount to NAV, as offering a compelling way to accrete NAV per share to the benefit of long-term shareholders.”