DCC plc tender offer

[letitroll]

If I understand you, you are arguing the very opposite

Yeah that's right. All things being equal, DCC's market value should rise relative to the pre-tender announcement price by the amount of shares outstanding that get taken out, adjusted for the earnings no longer owned by the business. Some of that move has already occurred because the market efficiently prices in the probability of a successful tender.

What you are describing, a share price that falls back to ~£49.60, would effectively signal a failed tender. It would imply the market believes DCC destroyed value by selling a unit and buying back stock.

Broadly, a drop back to that price means the market believes DCC first didn't get a good price for Healthcare, and then misspent the proceeds buying back £600m of its own shares in a 'worse' business (Energy).

In reality, the math proves the opposite. They sold a low-growth asset (Healthcare) at a high multiple to double down on a higher-growth, higher-RoE asset (themselves) at a low multiple.

Here is the actual math on the trade:

1. The 'Sell High' (DCC Healthcare Disposal)

• Sale Price: Sold for an Enterprise Value of £1.05 billion.
• Earnings Lost: In FY24, Healthcare contributed ~£88.1m (12.9% of group operating profit).
• The Multiple: They sold the division at roughly 12x Operating Profit.

2. The 'Buy Low' (The Tender Offer)

• The Pot: They are using £600m of proceeds for this tender.
• The Strike: At the mid-point (£51.70), they will cancel ~11.6 million shares.
• The Multiple: At £51.70, DCC trades at roughly 10x earnings (and closer to 7x EV/EBITDA).

3. The Conclusion (The Arbitrage) Management effectively sold a unit for 12x to buy back their own stock at 10x. They are swapping expensive earnings for cheap earnings.

If the share price falls back to £49.60 after the tender, the market would be assigning a P/E of roughly 9x to the remaining business. This would be a perverse outcome: punishing the company for a value-accretive deal.

The Financial Engineering Trick. The real magic here is how they protected EPS while shrinking the company.

• Operating Profit Lost: DCC gave away 12.9% of its operating profit (Healthcare).
• Share Count Reduced: Between the £100m buyback already done (~2.8% reduction), the current tender (~11.8% reduction), and the future £100m earn-out (~2% reduction), they are on track to shrink the share count by ~16.6%.

The Result: The share count is shrinking faster than the earnings.They made the company smaller, but EPS actually gets bigger. Combine that with the fact that the remaining business (Energy) has superior growth and RoE metrics than the bit they sold, and the valuation multiple for those EPS should be expanding for RemainCo DCC on go forward basis, not compressing.

 

[Brendan Burgess]

Some of that move has already occurred because the market efficiently prices in the probability of a successful tender.

This really disproves your point.

You and I agree that the market is efficient.

So this brilliant idea to enhance EPS by selling off less profitable businesses was factored into the value once the sale was made and the tender was factored in immediately it was announced.

The price of the shares will adjust as I have suggested on the day it goes ex-tender.

Brendan

 

[letitroll]

You and I agree that the market is efficient.

So this brilliant idea to enhance EPS by selling off less profitable businesses was factored into the value once the sale was made and the tender was factored in immediately it was announced.

The price of the shares will adjust as I have suggested on the day it goes ex-tender.

Very efficient....so much so that the move up in price we've seen on foot of the DCC Healthcare sale itself (pre-tender announcement & on announcement) also has an element of 'tender break' execution risk premium....the risk that the tender doesn't go ahead for whatever reason & the EPS value accretion we discussed above doesn't occur....for example, if DCC mgmt in a rush of blood to the head decide to blow the £600m on a new shiny corporate HQ instead of the as promised tender.

The tender completion moves the EPS accretion from a probability-weighted outcome to a certainty. That alone makes your fallback to the pre-tender announcement price very unlikely.

But really, by arguing for a fallback, you are breaking your own "Efficient Market" framework. You are focused on DCC's value at the TopCo level (Market Cap), when really you need to go micro and think about DCC on a PER SHARE basis and its market cap as a function of underlying EPS and the multiple of EPS the market is willing to pay.

The share price being a function of EPS × Multiple....the market cap being the share price x shares outstanding.

Here is the quick math example adjusted for the Tender Premium:

1. DCC Pre-Tender

• Total Earnings: £100
• Shares Outstanding: 100
• EPS: £1.00
• P/E Multiple: 10x
• Share Price: £10.00
• Market Cap: £1,000

2. The Tender (The Real World Arbitrage)

• The Sale: DCC sells a unit contributing £10 of Earnings (10%) but sells it at a high multiple (12x), generating £120 Cash.
• The Premium Buyback: To tempt shareholders to sell, DCC pays a 6% premium over the market price.
• The Math: They pay £10.60 per share.
• The Result: £120 cash / £10.60 price = 11.32 shares retired.

3. DCC Post-Tender (Real World - Efficient Market)

• Total Earnings: £90 (We sold £10 earnings)
• Shares Outstanding: 88.68 (100 minus 11.32 retired)
• New EPS: £90 / 88.68 shares = £1.015 (EPS is UP ~1.5%)
• P/E Multiple: 10x (Valuation Continuity)
• New Share Price: £1.015 × 10 = £10.15 (Price Rises)
• New Market Cap: 88.68 × £10.15 = £900
• Note: Even after paying the premium to exit shareholders, the remaining shares are worth MORE (£10.15) than they were at the start (£10.00) because the unit sale, stock buyback arbitrage was so wide.

4. 'Brendan's World' (The Fallback)In your world, the share price must fall back to the pre-announcement price of £10.00.

• Total Earnings: £90
• Shares Outstanding: 88.68
• New EPS: £1.015
• New Share Price: £10.00 (Your Assumption)
• New Market Cap: 88.68 × £10.00 = £886.80

To make your "fallback" thesis work, the implied P/E multiple has to drop.

• Price £10.00 / EPS £1.015 = 9.85x P/E

You are arguing that the market—upon seeing DCC successfully execute a value-accretive tender—will immediately decide to punish the company by de-rating its valuation from £900 (10x multiple) down to £886 (9.8x).

Why would an efficient market destroy shareholder value simply because the company kept its promise to buy back stock? Even paying a premium, the math works: Unit sold at 12x... deployed into buybacks at 10.6x. The transaction resulted in a company with higher EPS. The arb spread is 20%....x12 healthcare unit sold, cash proceeds deployed into x10 unit....DCC could 'afford' to pay a tender premium of up to 19% to exit shareholders and even in that world continuing shareholders post-tender would see underlying EPS go up!

To which you can add that at a high level the RemainCo now also has a higher EPS growth outlook (DCC is doubling down via buyback on the faster growing unit exiting the slower growing unit), structurally higher margins, and higher RoE. These are not classically arguments for the market to start paying a LOWER multiple of earnings for a company....which again your fallback framework call for.

 

[Corola]

This ChatGPT regurgitation is very distracting.

 

[letitroll]

Think your going kinda wrong here in three ways

The "Pizza Slice" problem (Market Cap vs. Share Price)

Confusing the size of the company with the value of the share. The company can get smaller (DCC has) but the shares can maintain value or indeed go up....if the transaction that precipitated the company shrink....was value accretive.....DCC Healthcare was.

The "Efficiency" Paradox

Logical loop regarding market efficiency.

The market foresaw this, so the price will revert to the pre-hype level.

If the market foresaw value, it repriced the stock higher to reflect it. An efficient market doesn't "price in" a benefit and then immediately erase it the day it becomes real. That would be an inefficient market.

The "Valuation Continuity" Error

Your thinking about share price Continuity when the market enforces valuation continuity (P/E = 10x). The Valuation Multiple is the anchor. Because the earnings per share have risen (the math), the price must rise to keep the multiple steady. The model implicitly assumes the market will decide to downgrade the quality of the company (lower P/E) immediately after it does something smart.

 

[letitroll]

This ChatGPT regurgitation is very distracting.

You bet - but typing up the math myself is a part-time job......and FYI its Gemini....and FYI its hybrid of Gemini doing the labourous math and me!

And its also 100% correct on the theory and the math!

 

[Corola]

Ok, but it's writing all the commentary as well.

You have....a very particular style....of typing...your posts.

But here's the real trick: when it—suddenly—becomes perfectly formatted it's obvious that it's not you.

 

[ClubMan]

You have....a very particular style....of typing...your posts.

Yes! I've mentioned it before...... and it's really... Distracting.....

 

[letitroll]

Ok, but it's writing all the commentary as well.

I fed it the commentary........and it......helped.......tidy up......the formating. The thrust of it is all mine.

Its quite a complicated idea to get across to non-finance folks. The intersection of mkt cap, earnings, per share earnings, multiples. I dont have time to write a thesis on DCC, efficient markets and accretive buyback dynamics with math!

Big picture trying to steer Brendan correctly on the DCC tender dilemma.....I mean as @Brendan Burgess correctly identified CGT kills any tender arb dream....but broadly what kills it the most is what DCC is doing is smart, fundamentally accretive to continuing shareholders.....and I think my voluntary redundancy analogy is the right way to think about this situation they are using a small premuim, lets call it 5-10%, to gather up the least enthusiastic DCC shareholders to allow them in one fell swoop to 'take out' 12% of shares outstanding, capturing the spread between the DCC Healthcare exit multple and the RemainCo mutlple....the leakage on the deal, is the premuim they end up paying when the tender strike price is reached.

 

[Brendan Burgess]

Hi Gemini

You are completely missing the point.

And vomiting out these calculations does not change it.

The market makes a valuation decision based on announcements and other information.

1) The sale of a low earning division for a better/worse price than expected
2) The announcement of the tender details

3) On the date it goes ex-tender, a mathematical adjustment will be made independent of the market assessment of the long-term valuation of the process.

The tender value will be so close to the market value that the adjustment may well not be noticed.

Or the market relief that the tender is successful may boost the share price by more than the adjustment.

 

[CitizenErased]

The problem with your analysis, if I understand it, is that a company can just keep buying back shares and inflating its share price without a limit.

Next plc are one of the better companies at explaining their approach to buybacks and how they consider buybacks in the context of the prevailing share price - namely how they apply an "Equivalent Rate of Return" methodology to determine whether to pursue buybacks (vs, say, a special dividend).

 

[letitroll]

On the date it goes ex-tender, a mathematical adjustment will be made independent of the market assessment of the long-term valuation of the process.

What is the mathematical adjustment your talking about?

 

[Brendan Burgess]

What is the mathematical adjustment your talking about?

DCC plc tender offer

Any other shareholder in DCC plc out there? Have you found any review of the tender offer? I will read all the documents at some stage, but if there is a steer by a stockbroker, I would read it first. https://www.dcc.ie/investors/tender-offer I am guessing that the right strategy for a small...

www.askaboutmoney.com

 

[letitroll]

Yeah your treating DCC like it’s cash box with a bunch of shares outstanding rather than a going concern.

Also suspect your view of a tender is too informed by a mental model you have for dividends….in a dividend the cash (economic value) leaves the company and its underlying shares for good….and so consequently on the ex-dividend date the companies share price adjust downwards to reflect this economic value which is no longer captured by the underlying shares ….post-tender completion is different however - for continuing shareholders the economic value of the cash on a per share basis isn’t gone for them, it’s been used to expand their economic participation in the future earnings stream of DCC which is not a cash box but an operating business.

DCC’s market cap/enterprise value will go down….but the shares won’t (in a truly accretive division sale and tender buyback transaction)….a new post-tender floor has been created on per share basis cause the economic value (the cash) didn’t leave the underlying shares, it went INTO the shares….as opposed to a dividend where it the leaves the companies treasury AND the underlying shares….in accretive tender it leaves the treasury and goes INTO the shares. Big difference between the two.

 

[letitroll]

it leaves the treasury and goes INTO the shares

A small amendment to the above...to get technical....cause I keep using the word accretive...and it deserves an explanation as the theory hinges on it

- the underlying unit sale & buyback transaction needs to be done at the right arb price.....internal unit sold at x12 for cash, tender buyback of RemainCo stock done at x10....this is a 20% deal spread...this is value accretion
- RemainCo needs to have at least the same or better quality than OldCo...growth, margin, ROIC post unit sale or you sold gold to double down on bronze so to speak...business quality matters, no matter how many shares you get to cancel in a buyback.....a less good business, is a less good business and the market will punish that from a multiple standpoint
- but it doesnt stop there - you need now get the tender/buyback off in way that as much of the deal spread (20%) gets delivered to continuing shareholders....so you pay a premium to some measure of VWAP and even that VWAP has a little sale news - tender front running in it (yes some of the financial alchemy value pot of the transaction gets eaten up by all shareholders here way before the tender itself, the market is efficient after all).....but you've got 20% of whatever the total EV sale was to play around with to stay in the accretive zone...and so you figure out a tender premium you think will be enough to get a bunch of shareholders to voluntarily sell, the lower the premium achieved the higher the remaining deal spread captured by the continuing shareholders (the higher the new share price floor will likely to be)....cause EPS will feel more uplift as more of the value accretion is captured by continuing.

Inverting the above....I've seen companies where they've planned a unit sale followed by a tender and where they ultimately abandoned the tender buyback plan......cause they do a unit sale at say x12 for cash..with the expectation they'd get to buyback the RemainCo stock at pre-sale multiple of x10.....but once the deal gets announced/completed the market really likes it decides to re-rate the shares higher to a x13 multiple....a buyback now on an EPS basis would be value destructive...selling low x12 to buy high x13...a deal like this would see EPS for continuing post-tnder shareholders shrink.....a company in this situation should and would pivot to a special dividend as a means to return the cash from the sale.

 

[Brendan Burgess]

Hi Gemini

Again, you are completely missing the point.

It's the timing of the issue.

You are arguing that the sale of underperforming businesses and the return of cash will increase the long-term value of DCC plc shares and I am not disagreeing with this.

All I am pointing out is that on the day the shares go ex-tender, the shares will be adjusted downward.

The effect will be very small as the tender price will be so close to the market price.

But it might help if you considered a much larger premium.

Let's say that the DCC share price is still £50 but they decided to buy back 10m shares at £100 each.

It's clear that someone should tender all their shares at £100, no matter how positive they are about the future of DCC. Because they sell their shares at £100 and buy the same number of shares back at less than £100.

 

[Itchy]

All I am pointing out is that on the day the shares go ex-tender, the shares will be adjusted downward.

“In theory, there is no difference between theory and practice. But in practice, there is.”

I thought the evolution of your CPL story (which you referenced earlier) was instructive. How did you rationalise the 14% premium the (efficient?) market applied to your theoretical ex-tender price, at that time? (Hopefully DCC will 4x from here like CPL did!)

Theoretically, the share price should fall to €2.63 after the tender offer.

They are €2.66 this morning, so that's near enough.

I spoke too soon. They closed today at 3 euro, the same as the tender price.

This makes no sense unless there was some other story to boost the price.

 

[joe sod]

So after all this very informative discussion especially from @letitroll , are you going to partake in this buyback and sell your shares back to DCC Brendan?

 

[CitizenErased]

I spoke too soon. They closed today at 3 euro, the same as the tender price.

This makes no sense unless there was some other story to boost the price.

Brendan

CPL was a bit of a different beast in terms of trading liquidity I guess - much lower daily trading volume compared to DCC. Could have simply been the fact that the on-market trade reporting of the Tender Price (€3.00 in that case) on the day the tender completed was enough to move the price to that level on the day? (Edit, just checked and trading volume on the day that CPL tender offer closed - 2 Nov 2011 - was solely related to the on-market trade reporting of the tender offer purchase of 6.6m shares, so that would have driven the closing price of €3.00 on that day).

 

[Brendan Burgess]

How did you rationalise the 14% premium the (efficient?) market applied to your theoretical ex-tender price, at that time?

CPL was a bit of a different beast in terms of trading liquidity

That is the point. I didn't have a big holding in CPL - from memory about €30k worth. Long before the tender I rang my broker to sell them and he said that dumping such a large amount of an illiquid stock would hit the price hard. I was really shocked.

So the Efficient Market Hypothesis simply does not apply to small, rarely traded companies.