Stockwatch: inside this publisher’s high-stakes deal for GoCompare

Future has inked an agreement to buy GoCo for £500 million, but will this up the risk/reward profile of the buyer?

What to make of a new combination taking shape in the media sector? Media group Future (LSE:FUTR), a £1.6 billion colossus in magazines and websites – with a sales multiple of more than 6x – has surprised the market by unveiling a £500 million deal to buy GoCo (LSE:GOCO).

This is better known as the parent of the GoCompare price comparison website. It also lately developed the WeFlip service that automatically switches customers to the cheapest utility deals. 

Why has GoCo’s stock rise faltered in response?

While the integration appears to have some logic, both sets of shareholders must be initially quite miffed. Future’s price dropped about 15% to 1,700p, given its highly-valued earnings are being diluted by the part-share offer for GoCo.  

A sceptic could say that the claim of a 32% premium for GoCo is only because its stock has recently been low amid Covid-19. Also, 2019 earnings were depressed (see table) due to costs of investment in WeFlip. 

After Future’s price dropped, it devalued Future’s 136p part-equity offer such that GoCo’s price also dropped, from 132p initially to 120p. This compares with a 138p all-time high in June 2018.

Future is partly capitalising on its high rating 

GoCo shareholders are being offered some extent of premium for control but it is based on classic financial engineering in takeovers, where highly-rated equity is exchanged for lower-rated.  

Even now, Future’s price-to-earnings (PE) ratio is over 50x on the basis of £8 million net profit in its last financial year. This will drop to 20x if it meets expectations for £68 million profit in its latest year to end-September, and £84 million in 2020/21.  

• ii view: why shares rocketed at magazine publisher Future
• Virgin Money takes Lloyds Bank and others down with it
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

GoCo may appear not dissimilar given its PE ratio for its 2019 results is 33x at 120p a share currently, reducing to 20x if recovery expectations are met for 2021. 

Yet 2019 was a trough year and the investment in auto-switching is now starting to bear fruit. A 23 October update cited customer numbers for that service up 148% year-on-year to 587,000, as demand for and awareness of it continues to grow.  

Future’s timing therefore looks good. The table for GoCo shows it making well over £20 million in 2017/18, although in stock market terms the group has struggled to sustain much of a rating. 

After floating four years ago at 60p a share it peaked at 138p in June 2018, then retreated to a circa 70p to 100p range until Covid-19 took it briefly below 50p last March. It then rose back up to a 90p to 110p range. 

Sentiment towards GoCo has struggled since 2018

Part of the issue for investor sentiment is that price comparison websites were perceived to have peaked – at least for exciting growth - by mid-2018. 

Moneysupermarket.com (MONY) quite similarly saw its stock enter a stubborn sideways consolidation, although it was able to offer a more material 4%+ yield. 

GoCo enhanced its bread-and-butter price comparison technology with the jam of a rewards side (customers offered treats when buying an insurance policy etc) and automatic switching. 

Mild disillusion – despite a fundamentally sound business – was why I initially drew attention to GoCo as a ‘buy’ at 65p in December 2018, re-iterating this in March 2019 – both times after the directors bought substantially. 

Last April, at 77p, I noted its respectable 25% return on capital as likely to improve while the auto-save side continues to attract business – also takeover potential, although I suggested this might be a private equity buyer. GoCo’s strong cash flow profile was amenable to a debt-driven purchase then steadily paying debt off. 

Yet underlying trading at GoCo has stayed robust 

The first half of 2020 showed good progress in revenue terms, up 9% to £82.8 million, but higher distribution/administrative costs shaved operating profit 19% to £7.7 million Last March’s 2019 preliminary results primed investors to expect a second-half weighted 2020 year as investment continued. 

October’s update then cited “another very strong quarter”, with revenue up 13% to £131 million “driven by exceptional growth in AutoSave”. However, price comparison also did well. It was up 7%, helped by car insurance out-performing, and the rewards side did well too. 

Despite Covid-19 the business has made plenty of money, and net debt reduced during the quarter, though this was not quantified. The interim results had shown £7.7 million operating profit trimmed by £1.6 million finance costs as a result of £80 million debt. 

GoCo had £66 million negative net tangible assets at end-June, even slightly negative net assets, so possibly this came into the equation when negotiating takeover price. Yet it is a business with substantial brand/reputational value, Future doubtless perceives. GoCo must have spent millions over time, on expensive TV ads. 

Future’s move looks mostly opportunistic 

I remain quite surprised Future is reckoning on synergies between digital publishing and price comparison-type services.

Also, GoCo directors’ capitulating suggests to me, they are less than altogether confident about sustaining growth in price comparison – also exacting profit not just revenue growth – from auto-switching. In other words, to get the stock back up to 138p by organic means. 

GoCo’s chairman, Sir Peter Wood – owning 29.9% - may see this approach as a pragmatic way to clear up and move on. 

Future’s declared rationale with the takeover is “to create a leading offering for consumers, providing complementary insights that enable consumers to make informed choices in their passions, interests and key purchasing decisions”. It is “a truly unique opportunity to capitalise on combining Future’s deep audience insight with GoCo’s expertise in price comparison, also both companies’ technology”.  

On a more mundane level it should enable GoCo to cut marketing costs by dove-tailing with Future’s titles, which rank highly in Google searches. 

My concern is this deal representing a classic combination of an acquisitive-hungry CEO at Future with a fee-hungry investment bank adviser. Future’s financial ramp-up, as shown in the table, reflects buying and digitising a long string of magazines; the history of Goldman Sachs shows opportunism throughout its history.  

Recalling the 1980s takeover boom, there were numerous examples of exchanging highly-rated equity to buy relatively lower-rated targets, as a means to boost the acquirer's earnings per share. Typically, such acquirers spread their wings too far and hit turbulence. 

It would be presumptuous of me to under-estimate Future’s CEO, Zillah Byng-Thorne, who may in time prove that buying and integrating GoCo was a master stroke. But it raises a sense of déjà vu in past market cycles, of go-go stocks led by ebullient CEOs with financial advisers egging them on. Fundamentally I am wary after the 1980s takeover boom.

GoCo shareholders’ decisions will be a technical influence 

My sense is to avoid this combination with fresh money, at least until there is better proof. It will be interesting to see what Sir Peter Wood does: sell down an extent of Future equity he receives? 

Mind that, with capital gains tax liable to rise to pay for Covid-19, this may tilt some GoCo private holders towards cashing in anyway.

Existing Future holders who are content with their CEO may prefer to ‘hold’ and give her more time. 

But to GoCo holders I would say: be wary of entering this combination, as its risk/reward profile has much to prove.

Disappointingly the stock now trades at 120p versus the 136p offer, part-based on Future’s recent high. Yet as a medium-term tactical stance I still suggest watching with a view to ‘sell’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.