DMGT has reduced its holding in Euromoney Institutional Investor (LON:ERM) from 67% to 49%, meaning results will no longer be consolidated and removing a major barrier to investment in ERM for some potential shareholders. Of the 32.2m shares involved, 13.0m have been placed with investors and 19.2m bought back for cancellation, all at 975p, a discount of 13% to last night’s close. The reduced share capital mechanistically boosts the EPS and management has also indicated a review of the dividend payout ratio. We will formally adjust our forecasts when the buyback and cancellation are completed.
The transaction brings a number of material advantages: First and foremost is that it normalises the status of the company, allowing it full strategic autonomy (although the long relationship with DMGT has been stable and supportive). Secondly, the accretive impact on earnings per share. The scale of the spend on the buyback at £187.2m is greater than the net cash balance at the September year end of £83.8m, pushing the group back into a net debt position. The underlying strong cash flow characteristics of the business would suggest that this would largely have unwound by end FY18, barring further acquisitions (an unlikely scenario). We will revise our estimates fully when the cancellation is completed on approval by the independent shareholders, ie not DMGT, expected by end December. A rough recast implies an increase of 13% in EPS in FY17e, with a greater impact in FY18e with a full year effect of the reduced issued share capital and lower implied interest as the debt reduces. Euromoney has also said that it is “to review its dividend policy with a view to increasing its payout ratio,” which indicates a meaningful step up in dividend when the two moves are combined. The low historic liquidity in the shares has limited the pool of potential investors, which should now broaden.
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