VTG just a couple of weeks ago announced the sale of their ICT business to Telstra. This was the main part of the whole company and in the announcement have flagged the intentions that a large part of the proceeds will be paid out via fully franked dividends. In fact, with the shares trading at about 80 cents now, the company said if the deal gets approved then the fully franked dividend would likely be in the range of 39-45 cents a share. The current market cap here is currently about $130 million.

If the dividends get paid out the company will be left to focus on the remaining business called Artisan, specializing in the skin health and wellness category. Whist this side of the company is borderline profitable, the revenues are growing by more than 40% so it might have plenty of potential. Given that the announcement speaks of the company leaving aside around $35 million even after paying out these dividends, perhaps there is limited downside overall here for those that like their franking credits. The shares have fallen from 93 cents since this deal was announced as some investors were hoping for a better sale outcome to Telstra.

Perhaps some of the institutional shareholders might push back on management here, try and get more cash / franking returned to shareholders? Or could they even think about voting against this deal? Given that the share price reaction has been negative since this announcement, whilst I think it is unlikely, even if the deal got voted down it could even be good for the shares. Or as I suggested if they can tweak the path forward so that more money can be returned to shareholders in the shorter term via franked dividends, and less get kept with the remaining Artisan business perhaps that can be good for the share price. Shareholders probably deserve more of a say whether so much cash should be left in the remaining business?

Well yet another ‘Buffettism’ rings true - that of quality of management. No kudos to me for getting the timing right and the numbers wrong and wrong by about $50m.

Retail shareholders and I suspect SPHERIA  who own 19% of VTG are up in arms. How could the directors let a preCovid annual EBITDA of $70m go for just $110m when other lesser franchisees  were reputedly getting multiples well over 2x

Even if we trade out to FY25 the coy could have additional EBITDA of over $250m.

Many questions to be answered here and they might find difficulty getting 50% of SH approval. Fortunately I have a profit but a beer profit and Fosters at that. Was looking for a krug! Not to be, atm.

I truly hope my exuberance hasn’t led any astray.

the VTG loss is a TLS gain.

Sale of Vita Group’s Retail ICT and Sprout business to Telstra

24 September 2021

Vita Group (ASX: VTG) today entered into a Share Sale Agreement (SSA) for the sale of its Retail Information and Communication Technology (ICT) business to Telstra (ASX: TLS) for cash consideration of $110 million, subject to a net working capital and net-debt adjustment mechanism (referred to as the Vita Retail ICT Sale or Proposed Transaction).

Highlights

• The Proposed Transaction provides shareholder value via an expected fully franked Special Dividend of approximately $65 to $75 million, representing $0.39 to $0.45 per share, to be paid in two payments, with attached franking credits of up to approximately $0.17 to $0.19 per share (based on current estimates).

• Vita intends to retain approximately $35 million to fund growth of the Artisan Aesthetic Clinics business.

• The Vita Board considers the Proposed Transaction to be in the best interests of Vita Shareholders, given Telstra’s intentions to transition the Telstra branded retail store network into Telstra ownership.

• The Proposed Transaction is conditional on, amongst other things, 50 per cent shareholder approval, with an Extraordinary General Meeting currently expected to be held on or about 5 November 2021.

***

Propitious timing from @PortfolioPlus who posted on this two days ago and predicted the likelihood of this going ahead before Xmas.  Although the consideration for the divestment is considerably less than they hoped for (without doing any analysis myself their justification for the amount looked reasonable...even conservative) and I wonder whether they think shareholders have been somewhat dudded?  In any case it is likely the SP gets a nudge up today and shareholders will need to make a decision about whether they take advantage of this and forego the partially franked dividend or place faith in management to execute against the remaining business.  I can't believe I'm saying this but Telstra actually looks like it is having a bit of a purple patch at the moment.

[Not held]

Now here’s a short-term proposition flying under the radar, yet in plain sight!

Situation: One of the ASX’s largest (and largely unloved until recently) companies which is trading on an EV/EBITDA of around 10x has a golden opportunity to snaffle a retail string of shops which are very profitable, asset light and potentially on a 2.5x EBITDA.

Said company has a bag of cash and the purchase of these retail outlets is part of its well-received new business plan.

Would the CEO be viewed as a hero by acquiring at 2.5x EBITDA to then be added to his pool of other assets and revenues where they will be revalued at 10x EBITDA? I would think so. Not only that, they bolster his FC’s which he desperately needs to keep his retail shareholders happy and they are mum and dads by the hundreds of thousands.

So this company is TLS and the CEO is Andy Penn – both in the market good books atm.

Let’s jump to the other side of the table here and understand that if the deal is done around 2.0x to 2.5x then the cash injection into this vendor company will be around $170m to $220m (there are a few moving parts here which are no doubt being thrashed out right now). This is worth $1.03 to $1.32 per share. Now these shares are currently trading at 90c! But wait there’s more value in said vendor company than this. $38m in cash + a pool of franking credits. Indeed, the franking credit value adds another $33m in value to shareholders plus there is another operating business where the sunk costs in same must be approaching $40m.

And I’m betting this deal is going to go off before Xmas. It’s not a case of IF but when and how much.

Of course, there are issues to consider within the vendor company which is VTG. Maxine Horne holds around 18% of the company but this is well down on previous. Spheria hold another 18%. Will the directors declare a special dividend to use up the FC’s? Hope so, they would be worth a grossed up 67c per share. The pressure is definitely on to look after SH’s. Will the company hold on to the cash to build up the existing business? Maybe some of it, but hey straight up, it isn’t big enough to maintain an existing HO structure as presently exist. The company will definitely need to be pared back.

I hold in RL because I see a quick profit within a few months, but I have been wrong in a similar circumstances when I held shares in Aveo (AOG) and it was facing a takeover. My lesson learnt is that BIG money blitzes small money every time.  

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.