Margaret Doyle

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Candover prices in disaster

June 3, 2009

Shares in Candover Investments appear to be pricing in Armageddon.The shares are trading at around 200p, against a net asset value of 1026p at the end of December.

Candover share price 2008 to June 3, 2009

Candover share price 2008 to June 3, 2009

The shares had a bit of a shock yesterday, thanks to the Financial Times. That reminded investors about covenants on the 198 million pounds worth of bonds outstanding- they restrict debt to 40 percent of the net assets. Journalist Martin Arnold also said that French investment house, Eurazeo, is no longer interested in buying the group of any of its portfolio companies.

Candover has got itself into a bind, but matters are hardly as bleak as the share price suggests. The group issued a statement in response to Arnold’s article, saying that it expects to meet covenants all through this year. I understand that, unlike Barclays’ stress test, this assertion is not predicated on any asset sales.

It is true that there are huge questions around the group’s future. It suspended its 2008 fund when it found itself unable to keep the promises it had made to invest in it. The board is undertaking a strategic review about where it goes from here. All options- a sale of the business or of the underlying assets, a rights issue, renegotiation of the debt or going into run-off mode – are on the table.

The gap between the share price and the net asset value indicates scepticism about the net asset value, or about the group’s ongoing ability to extract that value.  Are there more dud investments like Ferretti or Gala Coral in the pack? And, if there are, what would such write-downs do to the net asset value and, by default, to the ratio of net debt to net assets? That ratio stood at around 30 percent at year end.

True, net assets may come under some pressure. Profits in portfolio companies may be weak. Against that, Candover will be able to apply higher price/earnings multiples to these earnings thanks to the recovery in the market. Oriel Securities reckons that net asset per share when valued at the end of this month should comfortably exceed 800p. So the covenants are unlikely to be breached.

Candover could raise money by flogging some assets. It is due a windfall on the sale  of Wood Mackenzie this month. A rival may put in a bid well above the current share price. And if they don’t, shareholders can subscribe more money by way of a rights issue so that they keep more of the value themselves.

Armageddon is unlikely for Candover. And, if it escapes annihilation, shareholders should enjoy a rich reward for their courage.

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  • About Margaret

    "Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council."
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