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Trust Insider: what does Sherborne want from Electra?

by James Carthew on May 13, 2014 at 00:01

Electra is a split capital trust; it has convertible unsecured loan stock and zero dividend preference (ZDP) shares in addition to its ordinary shares. The ZDPs had an initial redemption yield of 6.5%, mature on 5 August 2016 and have a final capital entitlement of 155.41p. The £100 million convertible issue was completed in December 2010.

The bonds have a seven-year life, maturing on 29 December 2017 and, if not previously converted, pay a coupon of 5% per annum. They can be converted into ordinary shares at a price of £20.50 (so, with Electra currently trading at £26.60, they are well in-the-money; at the time the convertibles were issued, Electra was trading at £16.05).

Electra can make holders of the convertibles convert if its share price trades at or above 130% of the conversion price (ie, £26.65, coincidentally around today’s share price) for 20 consecutive days before the 29 December 2015. This caps the capital upside on the convertibles and limits the dilution for ordinary shareholders.

One thing people have picked up on is how busy Electra has been recently and they have speculated this is in response to Sherborne’s presence on the register.

Electra has announced quite a few deals over the last few weeks. It has invested £40 million in the secondary buyout of Innovia (a company that makes packaging films and the substrate for polymer bank notes including the planned £5 and £10 notes).

Other investments include Treetops Nurseries. Electra is funding its expansion plans as it snaps up nursery schools in the South East of England; a £15 million injection in CALA Homes, the luxury housebuilder, to allow it to acquire Banner Homes; £14 million for Calrec – the manufacturer of audio mixing consoles; an £83 million investment in Ogier Financial Services; and £85 million for Hotter Shoes.

All the deals though will have been thoroughly researched by Electra’s team and I expect they would have been working on some of them for months.

My hunch would be that this flurry of deals is more reflective of a more upbeat UK economy than some mad dash to invest their cash pile before anyone else can get their hands on it.

If things are picking up a bit, that bodes well for portfolio realisations and this could help push the net asset value higher over time.

Sherborne’s last announcement was that it had indirect interest in 19% of Electra and maybe it will stick around hoping that Electra will perform well from here.

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