“Shares in Ted Baker are down by 80% this year and 90% from their 2015 peak, so some shareholders may now be hoping (or even praying) for a bid to put the company out of their portfolio’s misery,” says Russ Mould, AJ Bell Investment Director. “Founder and former CEO Ray Kelvin’s 35% stake in the business means some see him as the logical buyer, perhaps with private equity backing, but for investors to fully assess the prospects of an approach, they need to think like a corporate raider themselves – and do the maths.
“Ted Baker’s market capitalisation is down to £154 million. At first glance, that may seem like a tempting price tag for a company with annual sales of more than £600 million, even if pre-tax profits are seen reaching no more than £5-10 million in the year to January 2020. After all, pre-tax profits peaked at £69 million just two years ago and it would not need a return to those lofty levels for the £154 million price tag to seem cheap.
“Better still, the company’s interim balance sheet, as of 31 July 2019, showed inventory of £209 million – so you could buy Ted Baker for its £154 million market cap, sell off the stock and come out better off to the tune of £55 million.
“However, it is nowhere near that simple for four reasons
· Any buyer or raider would have to pay a premium to the market price, to persuade shareholders to sell. It is unlikely to Mr Kelvin would be prepared to let his 15.5 million shares go at what he would doubtless see as a knock-down price.
· A bidder would inherit Ted Baker’s liabilities as well as its assets and have to meet and fund them. As of July, the retailer had a net debt position of £132 million. It also had lease liabilities of £178 million, so the actual cost of purchase would be the market cap plus debt plus leases – or £464 million – and that is before paying any share price premium.
|
|
£ million |
|
Market capitalisation* |
154.0 |
|
|
|
|
Subtract cash |
11.7 |
|
Subtract assets held for sale |
10.0 |
|
Add short-term debt |
112.1 |
|
Add long-term debt |
41.0 |
|
Add short-term leases |
35.8 |
|
Add long-term leases |
142.6 |
|
|
|
|
Total cost of purchase* |
463.8 |
Source: Refinitiv data, company accounts. *Before any premium to the prevailing market price
· Knocking off the £209 million in inventory that you could sell would cut the purchase price down to £254 million (plus a premium) – tempting for a firm with over £600 million of sales and a peak net profit of £53 million, which implies it would take you just five years to get your money back, if you could return the retailer to its former glories.
· But it is a big “if” whether the retailer can get back to those levels of profits, at least quickly – and there remains the issue of the value of that inventory. Ted Baker has already admitted that it may have overstated the value of the stock on its balance sheet by £20-25 million. This reduces the amount a raider could claw back by selling it and frankly reduces confidence in any of the numbers presented by the company, at least until the independent review is complete.
· Additional investment in the brand and IT will surely also be necessary once the operational review is complete.
“This is not to say a bid can be ruled out but the numbers are not quite so glaringly tempting when you dig behind them.
“Any buyer or raider would also have to consider when Ted Baker’s liabilities need to be met.
“In the year to January 2019, Ted Baker paid £2 million into its pension scheme while the annual bill for leases on stores on concessions was £54 million. A £60 million loan from RBS and Barclays matures in 2021, although £5 million of this has been repaid, and a £135 million revolving loan (of which £91 million had been drawn as of January) expires in September 2020.
“Two thumbnail ways of testing whether a company can meet its short-term obligations are the current ratio and the quick ratio. The higher the ratio stands above 1.00 the better in both cases.
“The current ratio simply measures current assets against current liabilities while the quick ratio is more exacting, as it excludes inventory from the calculation, in the view that liquidating stock quickly for the maximum value can be difficult. In Ted Baker’s case, the revelations about inventory valuation make this a sensible precaution.
“Allowances must be made for seasonal trading and cash flows, especially as Ted Baker’s peak selling season comes in its second half but the quick ratio does not offer a huge amount of comfort and this could also deter a corporate raider from thinking about a bid, pending further clarity on the inventory situation.”
|
|
H1 2019-20 (Aug’19) |
FY 2018-19 (Jan’19) |
|
|
£ million |
£ million |
|
Current assets |
307.9 |
319.7 |
|
Current liabilities |
263.6 |
212.0 |
|
Current Ratio |
1.17x |
1.51x |
|
|
|
|
|
Current assets minus inventory |
98.8 |
93.9 |
|
Current liabilities |
263.6 |
212.0 |
|
Quick ratio |
0.37x |
0.44x |
Source: Company accounts
