To describe 2016 as a bad year for Sepura (LSE: SEPU) is to put it mildly. Two profit warnings, a bailout fundraising that more than doubled the number of shares in issue, a chairman resigning, a chief executive taking extended medical leave, a third profit warning … you get the picture.
Frantic Friday
Sepura’s shares were near to 200p in the spring. They opened on Friday at 15p. However, the price began to rise sharply in the afternoon and ended the day at 18.5p.
At 17:14 came an announcement that Sepura is “in preliminary talks with Hytera Communications … regarding a possible offer for the entire issued and to be issued share capital of the company.” The announcement continued: “Hytera has confirmed to the Board of Sepura that any offer, if made, is likely to be solely in cash. There can be no certainty that any offer will be made, nor as to the terms of any such offer.”
The problem for investors looking to profit from this situation is that Sepura’s current financials and trading can only be guessed at — its half-year results are due in two weeks. So, valuing the business is nigh on impossible. Buying blind, after the rise on Friday and at a likely higher opening price today, simply in the hope that Hytera will make an offer and that the offer will be at an even higher price, seems an unattractive proposition to me.
I’m tempted
Watchstone (LSE: WTG) is a special situation that continues to tempt me. This company is the renamed rump of scandalous Quindell, which saved itself from insolvency by selling nearly all its assets to Slater & Gordon (S&G).
At Watchstone’s last balance sheet date (30 June) net assets were £130.6m (284p a share). I believe the balance sheet is now clean and that book value fairly reflects the worth of the company. The shares are trading at 187p.
Why the big discount? Well, £50m (109p a share) of assets — booked under trade and other receivables — is cash in an escrow account relating to the S&G deal. This is due to be released to Watchstone on 29 November. However, in September, S&G announced an intention to bring a claim against Watchstone.
Watchstone believes there are no grounds for a claim, and I share that view. I reckon the £50m is safe. I also reckon that potential compensation claims by ex-Quindell shareholders (currently amounting to less than £10m) can be discounted and that former Quindell directors will bear the brunt of any financial penalties resulting from a Serious Fraud Office investigation into past events at the company.
Deutsche Bank back in
I’ve taken a view on Watchstone based on experience, history and precedent. But as I said, I haven’t quite been tempted yet to back my judgement with hard cash. However, some people have.
Another late announcement on Friday — at 17:27 — revealed that Deutsche Bank now owns 7.54% of Watchstone’s shares. Deutsche initially sold down its stake after the S&G claim was announced. So, it has bought back in (and a few more shares than before). US hedge fund Beach Point Capital has also recently increased its stake a little, from 11.96% to 12.04%.
I don’t expect Friday’s Deutsche holding news to put a rocket under Watchstone’s shares , but it does bolster my confidence that there’s value here.