Jefferies International today upgraded its rating for IP Group Plc (LON:IPO) to ‘buy’ after the technology investor this week removed the worry over funding requirements which had kept the US broker’s stance previously at ‘hold’, and revealed a rejected, all-share merger approach to peer Touchstone Innovations Plc (LON:IVO).
On Tuesday, the FTSE 250-listed firm launched a placing, 1-for-13 open offer and offer for subscription of approximately 145.857mln new shares at a price of 140p each to raise net proceeds of around £195.7mln..
READ: IP Group rebuffed in merger approach; launches £200mln cash-raising
The firm said that the capital raising will “strengthen the financial position of the Group, enabling IP Group to deploy further capital into new and existing commercialisation opportunities both in the UK and the US and will provide the necessary capital to successfully launch and develop IP Group Australia.”
In a note to clients today, Jefferies’ analysts said its ‘hold’ rating for IP Group was based on the “looming funding requirement (est. £100m in each of 17E, 18E) and 30% premium to NAV.”
They added: ”Removing that funding issue at a stroke, and now at c.14% premium, we move to a Buy. “
The analysts pointed out: “Before factoring in the probable, positive but still pending Touchstone deal we raise our PT to 175p (vs. 169p) based on a US$3.5bn Oxford Nanopore valuation” – IP Group’s main investment.
They added that the cash raise covers the next two years and removes their 10% funding discount for the stock.
Jefferies says “tweaked/fairer offer would represent additional upside and a broader portfolio”
The analysts said that although they have included the current £200mln gross cash raise, they have not yet added to their valuation any additional cash - up to £66mln - or the mooted Touchstone merger, which it sees as adding significant portfolio upside.
They noted that Touchstone rejected the mooted merger on valuation grounds, but with the all-stock deal backed by 74% of its own shareholders and 52% of IP Group’s, they think there could still be an actual bid - which must be made by June 20.
On Tuesday, IP Group said the terms of the possible offer made to Touchstone comprised the issue of 2.1490 IP Group shares for each Touchstone share held.
The implied offer value was 307p per Touchstone share. However, IP Group said that if, as a result of an increase in its share price, the implied offer value per Touchstone share were to become worth more than 320p, the number of offer shares to be issued would be reduced such that the implied offer value remains at 320p per share.
Touchstone’s response had said that an “agreement on terms and governance could not be agreed prior to the capital raise” announced by IP Group.
The target firm added: “Any recommended proposal would need to reflect the best interests of Touchstone and its shareholders as a whole, and having regard to its management, the interests of employees and the position of portfolio companies.”
Jefferies' analysts pointed out that even a “tweaked/fairer offer would represent additional upside and a broader portfolio” for Oxford Nanopore-dominated IP Group.
In late afternoon trading today, IP Group shares were 1.8%, or 2.5p higher at 143.7p, while Touchstone shares were down 0.3%, or 0.75p at 301.25p.