At the end of February we described Waterman (LON: WTM) as ‘cheap and unloved’. Well Japanese group CTI Engineering is showing the consulting engineer some love today by agreeing to acquire it for 140p in cash, a whopping 83 per cent premium to Waterman’s latest closing share price.
CTI is the oldest of Japan’s top three consulting engineering companies and has had a full listing on the Tokyo Stock Exchange for twenty years. Waterman is also a long-established business with a settled management team. As well as bringing technical capabilities, Waterman will take CTI into new international markets as its first overseas acquisition. The Japanese buyers state that they believe in the UK as a place to do business and in its strategic importance in serving international markets.
Prior to the bid Waterman was valued at only £24 million; so the big premium doesn’t translate into a huge extra cash sum for the buyer. To get management agreement for the acquisition in a ‘people business’ is vital, which also argues for a good premium. But the key reason for that eye-catching 140p take-out price in the context of a 76.5p close last night is Waterman’s valuation. Profits are flat this year but should grow in the year to June 2018 and there’s a target to raise margins significantly over time. Yet as we observed two months ago, the shares traded on a p/e of just 8 and yielded a prospective 5%.
This meant that an agreed deal had to come at a good premium. At 140p the exit p/e is around 14.5 times prospective earnings, which is respectable but hardly outlandish.
Value is out there
With ‘value stocks’ it’s hard to identify what the catalyst will be to get the shares rerated. In our latest recommendation piece we suggested evidence of next year’s pick-up might be needed, but that Waterman’s yield provided a respectable return for investors while they waited. This bid is a useful reminder that there’s still plenty of value out there in small-cap land.