Looking at the MCP takeover offer and comments around it being...

Looking at the MCP takeover offer and comments around it being grossly mispriced, I thought I would make some brief comments.

First thing to note is that while Asia has been a point of focus in their presentations and growth strategy, MCP still gets the bulk of their earnings from Australia. And this part of their portfolio has proven to been fairly robust. Some rough calculations (erring on the side of caution) sees their normalised EBIT somewhere in the $17m - $30m range, which gives them enough to support a strong dividend while getting getting to a net cash position.

Extraordinary items (impairments to brand, inventory) is where they are most vulnerable, though once you exclude non-cash components the mid-term risk to actual earnings is low.

Looking at this as an acquirer:

From an M&A perspective, the existing capital structure is less important. More important are synergies, access to and cost of capital.

This, I am sure, would be Germinder (and his adviser's) approach. Looking over some of his other businesses -- and in particular Pact -- we can get some sense of how he (his and his wife's group) feel about debt and expected returns on capital, and we can apply this to MCP:


These ranges are by no means the best or worse that could happen, but seem like reasonable estimates on the assumption they make no further aquisitions and don't hit any major hurdles within the next 3-5 years.

(Also, as a bonus, there may also be room to extract operational benefits beyond MCP. I am not familiar with MCP's manufacturing processes, but as an example were Germinder to take control there may be room for synergies, and redirecting packaging manufacturing and handling toward a related entity (1/4 of packaging manufacturing directed to Pact; based on MCP's sale volume and Pact's margins, there is likely room to extract an extra $2 - $3m pa from the venture)

What I think is more interesting is that even if MCP were to end up reflecting something like that in the left hand column, it still offers a decent outcome for shareholders. Over a 5 year investment horizon, with $10m of fully franked dividends paid out each year, from a share price of $1.41 an investor will earn a gross yield of around 7.62%, plus 55% in capital growth, providing a total arithmetic pre-tax return of around 16.8% pa (approx 14% pa geomean). Net of tax (say, for this exercise, 40%) that comes in at about 11% pa.

Note:
Order depth is very interesting. 97 buy orders for 6.24m units, 73 sell orders for 486k units. Clear institutional orders (guessing: Gallin) at one-cent incremets up to $1.40. This is supporting the price. Frankly, were I charged with the responsibility of taking a position I would probably remove those buy orders as I get the sense this would spook many retail investors enough to see them cut-and-run. Those that remember their bid and commentary around The Reject Shop will recall that their interest in a target doesn't weaken -- it disappears completely. If 3-5 years is too long to wait, then perhaps selling at $1.41 (or so) isn't such a bad idea.