In parallel with its H120 interim results, Mercia has announced the acquisition of NVM’s VCT business for up to £25m in cash and equity, funded by a £30m placing at 25p per share (a 22% discount). Subject to shareholder approval, the acquisition increases AUM to £760m and moves Mercia towards being the UK’s number one regional investor. The deal expands Mercia’s shareholder register, further dilutes existing major shareholders and means Mercia should be profitable before fair value adjustments, closer to its target of an evergreen model (c £1bn AUM). In its H120 results, Mercia’s direct investment portfolio increased to £102.0m, with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Mercia has £17.8m of unrestricted balance sheet cash (pre-placing) and the shares continue to trade at a significant discount to NAV.
Mercia reported H120 net assets of £128.4m (FY19: £126.1m). The direct investment portfolio grew by 16.4% to £102.0m (FY19: £87.7m), with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Funds under management fell 5.2% to £361m and net expenses rose to £0.9m (H119: £0.7m). Management reiterated its strategic plan to double AUM to c £1bn and achieve an evergreen balance sheet by end FY22.
Mercia also announced the acquisition of NVM’s VCT business for up to £25m, comprising £16.6m upfront (75%/25% cash/equity) and a three-year deferred contingent consideration of £8.4m (75%/25% cash/equity). The acquisition brings AUM of £270m, increasing Mercia’s total AUM (H120: £490m) by c 50% to £760m. The deal is expected to be earnings enhancing in FY21, funded by a £30m institutional placing at 25p per share, a 22% discount to the closing price of 32p on 2 Dec 2019. Funds will be used to meet the initial cash payment for the acquisition, with the remainder (net of expenses) used to strengthen the balance sheet.
With the acquisition of NVM’s VCT business, Mercia has made significant strides towards becoming the UK’s number one regional investor and achieving an evergreen balance sheet. In the process it has extended its cash runway, strengthened its share register, increased the free float and reduced its perceived share overhang. Yet Mercia’s shares continue to trade at a discount to NAV (0.67x, 0.80x adjusted for the placing and acquisition), even before considering the embedded value of Mercia’s fund management business (an additional c 12p).
