Medica shareholders should sit tight after takeover offer in hope of a better price

We believe some shareholders might push for a better deal

On 9 March we highlighted small cap teleradiology specialist Medica (MGP:AIM) as an underappreciated quality business with a market leading position and exciting growth opportunities.

We argued the shares had been unfairly derated over the last five years despite the business doubling in size and subsequently trading on a 2023 free cash flow yield of 5.8% based on Numis’ estimates.

In addition, we highlighted comments made by fund manager Ken Wotton at Strategic Equity Capital (SEC) that the shares traded at a big discount to takeover valuations seen in past deals.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Private equity group IK Investment Partners has made (24 April) an all-cash takeover at 212p per share. That represents a premium of 32.5% to share price on the previous trading day.

Founded in 1989, IK Partners has a track record of investing in the healthcare sector, investing in 23 companies across Europe.

IK Partners said it believed taking Medica private would enable the group to achieve its full potential and help it meet the challenges of dealing with ‘significant’ demand for diagnostic imaging related to ‘structural’ shortages of radiologists.

WHAT SHOULD INVESTORS DO NOW?

While the board sees the exit price as a fair reflection of the quality of the business and offers a ‘meaningful’ premium, Shares has reservations at this early stage and would urge shareholders to sit tight.

There are two reasons for coming to this conclusion. Firstly, the premium isn’t that great in the context of recent trends. The average premia in UK takeovers have increased from 30% to 46% over the last two years according to law firm Skadden.

Secondly, the bidder has only secured around 20% of the vote so far including directors’ shareholdings which leaves plenty to play for considering other ‘unsolicited inbound interest’ according to the directors.

At the time of writing the shares were trading slightly above the offer price. [MG]