The Vita Group (VTG) FY21 accounts were underwhelming and reflect a fuzzy company which is fighting to have a reason for being.
Yes, in the past it has been a successful well-led, ‘asset light’ company which produces plenty of cash, but it has suffered the fate of many a distribution business.
Telstra announced in Feb this year that it would not be renewing the VTG distributorship of its Telstra franchise retail shops. A bombshell that may yet have a silver lining, depending upon how good CEO (and substantial shareholder) Maxine Horne is in negotiating with the Telstra apparatchiks.
You see, they are keen to bring many functions in house – all the foreign call centres are returning to Australia and Telstra is hell bent in taking back its retail selling arm. Already they have swallowed up the great majority of independent franchisees and they only need land the pesky VTG monster to complete this aim.
Right now they have the squirrel grip over VTG by virtue of the less than satisfactory trading in a Covid world. No doubt TLS want to pay a multiple of recent EBITDA and Maxine would be saying it is unfair to use an abnormal selling cycle as a basis for valuation. So the haggling is now 6 months old…and continuing. Telstra’s dilemma is that VTG’s contract runs through till June 2025, so they are going to have to pay to move VTG on early. They’ve got the cash to do it and should they pay anywhere near a reasonable price then the dowdy VTG will be looking in good fettle.
Suggestions are an EBITDA multiple of 2.0 to 2.5 – translating into a sale price of $150m to $200m.
This might mean the company can make a very attractive special dividend. It has some $77.5m in franking credits – sufficient to give out a special dividend of some 47c ff (67c grossed up) and this against a current SP of just 92c. But the cash to do so must come from Telstra ‘Mr Money Bags’. In the investor call today Maxine has stated that she knows she must look after the shareholders.
Of course, VTG can keep trading and generating EBITDA from the Telstra retail for the next 4 years and this in itself will generate much of the cash to get rid of these franking credits.
With the Telstra franchise gone what else has VTG got?
Right now, net cash at Bank of $31m, and that $23m of value in the FC’s, a rag tag of small inconsequential businesses (Maxine’s folly) might generate a few mill, plus it has an awful business mistake (Maxine’s big doozie of a folly) of investing in the NIMA space – code for non-invasive medical applications - called Artisan. Essentially, they do Botox and beauty treatments. They’ve ploughed plenty into it, but it is way behind track on getting to critical mass. Let’s say it has a $20m tag. Personally, I’d like Maxine to take this private, because it’s a dog.
But let’s cancel the Artisan value out against the CGT on the Telstra sale and we are left with a VTG value of around $200m to say $250m or $1.21 to $1.52.
Given that Telstra is cashed up and with its strategy well flagged, I believe they will move to end this standoff and cough up what is necessary to move VTG along.