Description

River & Mercantile Group PLC (“RIV”)  is an advisory and asset management firm. RIV has sold their main asset which was the US Solutions Business to Schroders after a strategic review for £230m. RIV has decided to return GBP190m of cash to shareholders, which is 220p/sh.

RIV at this point, pro forma the capital return, is composed of:

1. Cash (70p/sh),  and 

2. their UK focused AM business with AUM of ca. £3bn, generating £17m of revenues.

(the “stub”).

Pending the completion of the US Solutions Business sale to Schroders, the stub of RIV got sold via an all share acquisition to AssetCo PLC (“ASTO”). 

The announced sale price of the RIV cash + stub, pre capital return, was 334.5p assuming a constant ASTO share price of 1550p. At the moment if one buys RIV shares @ 265p then one can create ASTO shares at ~600p, with the current share price at 1420p.

That implies a non-annualised merger arb spread of 133%.

Clearly something is wrong here. So the “market” must think any of the following:

1. this “spread” is not arbitrageable as no borrow/liquidity is available on ASTO,

2. ASTO shares are not worth 1550p (pro-forma the merger), and/or

3. It's too complex.

The first item is easy to check and ASTO is indeed not liquid enough to be shorted into in any decent size, apart from borrow being very limited.

I will consider the second point below (and yes it is quite complex to get the PF numbers right).

AssetCo PLC has a storied past, but has effectively become a consolidator of asset managers in the fragmented UK market. It is headed up by Martin Gilbert, the ex-CEO of Aberdeen PLC. The ASTO website, states:

“The strategy principally focuses on making strategic acquisitions and building organic activities in areas of the asset and wealth management sector where structural shifts have the potential to deliver exceptional growth opportunities.”

Pre acquisition of RIV, ASTO has 6 assets:

1. Net cash £24.1 

2. RIV 5m shares

3. Saracen 100% acquired May 2021 for £3.4m

4. Parmenion 30% acquired July 2021 for £27.8m

5. Rize ETF 63% acquired July 2021 for £16.5m, with £5.25m commitment

6. Revera 100% acquired Feb’22 for £2.8m

Of all of these Parmenion is worth a mention. Parmenion is a B2B fund investment and advisory platform, with £9.3bn AUM, which has been showing strong growth to date. From the outside it looks like that the Parmenion acquisition was done at a good level. It looks like Martin Gilbert acquired this asset from his previous employer by using a private equity shop in the middle, who acquired 100% and then immediately selling 30% onwards to ASTO. Given the tension between Martin Gilbert and his previous employer this was the best way for him to acquire an asset that he knew inside out without compromising his negotiation position.

Based on channel checks we think there is tangible upside on Parmenion from here. Some people have suggested that the valuation has moved beyond the ~100m where it was acquired, suggesting that £150-200m would be current, given the continued growth since the acquisition and the nascent profitability.

Post the RIV acquisition, ASTO will hold significantly more cash (+70m) and will receive the stub business of RIV. We estimate that the RIV stub should make a 35% profit margin, with a £17m normalized revenue. In a base case we multiply this with 8 and in the bull case with 12. The bear case is a basement valuation at < 1% of AUM.

If we apply all the adjustments we get to the following:

Applying a risk adjustment we get a PF NAV for ASTO at ~1400p.

If we bomb this out and say that ASTO = cash + cost price of all assets then we get to ~1000p

This is all still significantly outside the ~600p where ASTO can be created today by buying RIV at this point. So even though a perfect arb is not possible (via shorting ASTO) we think that RIV is statistically and fundamentally cheap as a buy and hold into ASTO.

Other bits:

• ASTO has a clubby set of shareholders that all know each other. We think on balance this is a good thing.

• We have noted that billionaire Michael Spencer (of NEX/ICAP fame, amongst others, part of the same club) has bought into ASTO via RIV.

• The capital raise to finance the Rize acquisition was done at  £14.50/sh, which underpins the valuation above.

• The ASTO shares are illiquid and the main reason for that is that the shareholder base is quite concentrated. We believe the enlargement of the business and shareholder base after the RIV acquisition should mitigate this. 

• We also think that an easy way to promote trading amongst retail holders in ASTO, is to apply a reverse split, which we think is likely to happen.

Catalyst

The completion of the acquisition of the RIV stubco (post capital return) by ASTO.