Lancaster Investment Management has sent a letter to Alison Platt, Chair of Hargreaves Lansdown PLC (LON:HL), regarding the latest Consortium offer for HL.

Let’s recall that on June 18, 2024, Hargreaves Lansdown confirmed that it has received a further non-binding proposal from a consortium comprising CVC Advisers Limited, Nordic Capital XI Delta, SCSP (acting through its general partner Nordic Capital XI Delta GP SARL), and Platinum Ivy B 2018 RSC Limited, a wholly-owned subsidiary of Abu Dhabi Investment Authority (‘ADIA’) managed by the Private Equities investment department of ADIA.

The Consortium proposes to acquire Hargreaves Lansdown at a price of 1,140p per Hargreaves Lansdown share in cash, of which 30p comprises a FY2024 final dividend, with an option for Hargreaves Lansdown shareholders to elect for a rollover equity alternative in respect of some or all of their Hargreaves Lansdown shares.

The Board has decided to engage with the Consortium and provide confirmatory due diligence access.

Lancaster Investment Management wrote a letter to set their concerns.

In summary, Lancaster Investment Management’s Global Equity Funds are investors in and supporters of HL, with their interest representing c. 1.9m shares. Lancaster’s made an initial investment earlier this year and have been building its position since then.

Lancaster Investment Management states:

“Regarding this offer, we question: firstly, the valuation of the offer; secondly, the Board’s assessment of HL’s weak historic operating performance against HL’s potential for strong future growth; and thirdly a risk of potential conflict of interest in the terms of the current offer.

We question the fairness of a deal where we expect only a small number of shareholders will be able to remain invested via a private “rollover equity alternative”, while we expect the majority of shareholders, including Lancaster’s Global Equity Funds, will not be able to participate by going private”.

Lancaster Investment Management says the offer valuation is depressed compared to listed peers and to HL’s own trading history.

1140p (including final dividend) represents a multiple of c.17x earnings per share on calculation, which is a c.-14% discount to AJ Bell’s multiple, as the closest listed peer, currently valued at c.20x earnings per share. It is c.-40% below HL’s own 10-year average PE multiple of 28x. HL has only sustained at a lower multiple than that implied by the offer for a brief period during the “Global Financial Crisis” 2008-09, and over the last c. two years, since early 2022, when Lancaster’s would argue HL’s problems combined with global geopolitical and macro-economic upheaval to affect the valuation multiple.

Lancaster Investment Management argues:

“It is insufficient in our view to argue simply that HL’s recent troubles make valuation history and comparison less relevant to an offer today, meriting crystallisation of lower multiple for shareholders today. We agree with you that there is good momentum in the operational turnaround of the business; however we see the multiple as reflective of the past few years not the future.

AJ Bell and other peers clearly have enjoyed higher growth than HL in recent years. However, we would argue HL has strengths which should be weighed against this when considering a valuation multiple. For example, HL is the largest UK platform by assets under administration (AUA); it has the largest client base; it has the longest history and best-known and strongest brand”.

In Lancaster’s view HL’s problem areas are within the bounds of acceptable risk for an industry-leading, listed business: technology, marketing, client experience in particular.

Lancaster Investment Management argues the Capital Markets Day Plan (CMD, 22nd February 2022) together with current management’s strategy have already invested to tackle these issues.

The full letter can be found here.