Honeywell Share Price Rises 20% after Acquisition Notice
Honeywell Flour Mills share price has increased to N4.05 after the market closed on Thursday as equity investors react positively to the development, rising by about 20% from last week Friday close, a strong capital for short-sellers.
The acquired company’s share price had printed at N3.39 in the previous week before the deal notice. With the price appreciation, Honeywell Flour Mills Plc stock market valuation jumped to N32.117 billion, up 19.46% in 4 days.
In its review, investment experts at CardinalStone Limited estimated implied purchase consideration per share by Flour Mills of Nigeria (FMN) for 71.69% in Honeywell as N3.63.
Compared with stock market share price quotation, it thus means FMN Plc acquired Honeywell at a premium to its market closed. Since the deal was announced, Honeywell share price has gained about 20% in four trading sessions.
On Monday, Flour Mills of Nigeria Plc announced an agreement with Honeywell Group Limited (HGL) and FBN Holdings Plc (FBNH) for a controlling stake in Honeywell Flour Mills Plc.
The deals would involve Flour Mills of Nigeria acquiring 71.69% of HGL’s stake for an enterprise value of N80 billion and FBNH’s entire 5.06% stake in the target.
This implies that upon completion of the deal, Flour Mills of Nigeria Plc would hold a 76.75% equity interest in Honeywell Flour Mills Plc, CardinalStone said in a review.
Implied equity price to HGL AND FBNH
In estimating the implied equity price to Honeywell Group and FBNH, analysts said the final equity value per share will be subject to adjustments for net debt and working capital at the date of completion.
“Given that both Honeywell Group and FBNH deals were negotiated concurrently and agreed on the same date, management has guided that the basis for arriving at the final equity price per share will be the same for both deals”.
Using the transaction terms for FMN’s acquisition of HGL’s 71.69% stake as a proxy for determining the implied purchase price to both HGL and FBNH, CardinalStone estimated at N3.63 implied share price for the deal.
“Our implied purchase price per share does not account for the possible adjustments to net working capital, which we adjudge to be too unstable to give a fair reflection of the potential final purchase price”, CardinalStone said.
Analysts stated that Honeywell Flour’s September 2021 net-working capital of N14.6 billion is significantly higher than its eight-quarter average of N4.0 billion and could materially bias the implied purchase price if used as the basis for determining the final equity price.
Sensitising for potential changes to normalised or target working capital compared to actual working capital, based on an assessment of Honeywell Flour’s historical numbers, CardinalStone suggests an implied purchase price of N3.12 – N4.67 per share.
Minority Shareholders
In its disclosure, FMN hinted that Honeywell Flour would remain a listed entity, and its minority shareholders would be treated fairly in line with capital market regulations.
On the surface, CardinalStone analysts said this suggests that Honeywell will remain a subsidiary of FMN, but it is unclear if this truly reflects FMN’s long-term strategic plan.
“In our view, maximum synergies would be realised upon full consolidation of both businesses into one entity, which could cascade into a possible tender offer to Honeywell Flour’s minorities and the eventual delisting of the stock from the Nigerian Exchange”, CardinalStone stated in the note.
Implication for FBNH
FBNH’s disposal of its holding in Honeywell Flour Mills appears in line with CBN’s initial instruction in April to divest its stake in the miller, according to analysts. Assuming the deal is completed in FY2021, analysts at CardinalStone estimate the likely gain on disposal to FBNH to range between N717 million and N1.3 billion.
“Our capital gain estimate compares our implied purchase price range with Honeywell Flour’s close price of N1.33 on 31 December 2020, which, we believe, was used in determining the security’s carrying value in FBNH’s FY2020 books”.
More favourably, the acquisition by FMN could potentially ease concerns about the performance of FBNH’s loan exposure to Honeywell.
In its 2021/22 audited results, Honeywell disclosed a term loan of N10.4 billion obtained from First Bank of Nigeria Limited, with a restructured tenor of 6 years. It is, however, unclear how much of the firm’s N37.9 billion short-term borrowings were also obtained from the bank, CardinalStone added.
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