Shareholder Lancaster Investment Management Questions Hargreaves Lansdown Takeover Bid

Lancaster Investment Management, a shareholder in Hargreaves Lansdown (LON: HL.), published an open letter expressing concerns about the takeover bid from a private equity consortium led by CVC Capital Partners.

Last week, the board of Hargreaves Lansdown said it was willing to unanimously recommend an improved £11.40 per share bid from the consortium, which also includes Nordic Capital and Platinum Ivy (a subsidiary of Abu Dhabi's sovereign wealth fund).

However, Lancaster Investment Management, which revealed its investment in the company represents around 1.9 million shares, stated: “We remain unconvinced that this offer is fair for all HL shareholders.”

Their letter highlights several issues. Firstly they believe the £11.40 per share offer undervalues HL compared to listed peers and its historical trading. They argue HL's recent struggles don't justify such a low valuation, especially considering its strong brand and industry leadership.

“1140p (including final dividend) represents a multiple of c.17x earnings per share on our calculation, which is a c.-14% discount to AJ Bell's multiple, as the closest listed peer, currently valued at c.20x earnings per share,” said Lancaster Investment Management.

The firm also stressed its worries regarding the “de-equitisation” of the London stock market. “We consider this offer the latest in a stream of de-equitisation events in the UK market, which cause us dismay,” they said.

“We are not averse to private equity offers where there is also a ‘win-win' along with public shareholders and other stakeholders,” states Lancaster. “However, here we find it an unfortunate irony that HL, as a champion of open access to financial services, may itself now be close to exiting the public markets without full value offered to public shareholders in our opinion.”

Furthermore, they believe Hargreaves Lansdown's growth potential is being ignored. The letter emphasises HL's potential for future growth, citing the company's turnaround strategy, supportive regulatory changes, and growing demand for investment platforms. They believe the offer fails to capture this potential.

Lancaster also criticizes the offer structure, which allows up to 35% of shares to “roll over” into the private company. They see this as a two-tiered system that disadvantages smaller shareholders unable to participate. Additionally, they raise concerns about a potential conflict of interest for the Board and executives who might benefit under private ownership.

While the board argues HL's recovery requires a timeframe beyond public markets' patience, Lancaster believes a 2-3 year turnaround is acceptable for shareholders, especially considering positive signs in recent results. They urge the Board to give HL more time as a listed company.

The letter concludes by urging Hargreaves Lansdown to address these concerns and consider alternative options before endorsing the bid. They believe HL's future growth potential under current management justifies remaining a listed company for now, offering a better outcome for all stakeholders.