Dear Vp thank you for your kind offer

I won’t be accepting…

Vp‘s offer to buy 1/14 of its shares back, at 254p gives me mixed feelings.

The company is the newest addition to the Thrifty 30 portfolio and I think the shares are probably worth more than 254p so on the face of it the company, and shareholders that don’t accept the offer, are getting a bargain at the expense of shareholders that do.

Vp thinks so, one of the reasons for the tender offer is to enhance the per share value of the company to remaining shareholders.

But another reason is to:

deliver a more optimal capital structure for the business

i.e. make it more reliant on funding from debt. 

I’m suspicious of companies that ‘optimise’, recognising, especially for cyclical businesses like equipment hire, the optimal capital structure during good times often leaves companies overly reliant on debt during bad times.

When I wrote the two minute monologue for Vp a few weeks ago I felt its level of debt was already high enough, optimal, in other words.

On the other hand the cost, £7.8m, could probably be paid out of a good year’s cash flow without increasing debt, and judging by a trading update last week Vp may be about to have a good year.

One source of hope this transaction won’t weaken Vp’s financial position significantly is the size of the chairman’s interest, which even if Jeremy Pilkington‘s investment vehicle provided all the shares because no other shareholder accepted the offer, would still be over 50%. If it takes its 1/14 quota, his interest will remain at just under 55%. The other directors will not sell their shares in the offer, including managing director Neil Stothard who has a holding worth about £1.5m.

It’s hard to believe Pilkington would put the company he built at risk, but I’m going to update the two minute monologue to acknowledge the possibility.

At least, with the company buying chunks of itself, it’s less likely to make large acquisitions, which I identified as the biggest risk when I added the shares.

The Thrifty 30 is a model portfolio, it doesn’t have money invested in Vp. However to keep it as real as possible I must consider whether to part with some, or if shareholders chose not to sell their 1/14 allocations, all of the shares back to the company.

I have until 23 March to decide, but unless I think of a good reason why not, I will be keeping the portfolio in Vp.