HL SELECT UK INCOME SHARES

Rising like a Phoenix

Fund changes

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Charlie Huggins (CFA) - Fund Manager

28 September 2018

Back in February we revealed that one of our holdings, Fidessa, had been subject to a takeover bid. After several months of back and forth, the acquisition completed in August and we have reinvested the proceeds in a new stock.

Fidessa – a reminder of events

The initial offer from Temenos Group came back in February and valued Fidessa at £35.67, excluding dividends. Soon after, other bidders emerged with Fidessa’s Board eventually agreeing to an improved offer of £38.70 from ION Capital. This offer was accepted by Fidessa’s shareholders, with the acquisition completing in August.

We sold around 40% of our holding prior to the acquisition completing, reinvesting the proceeds in existing positions. Cash for our remaining holding was received on 17 August when the acquisition completed. The average sale price achieved was £38.46, resulting in a 49% gain on our initial investment, excluding dividends.

From Fidessa’s ashes

We have used the Fidessa acquisition proceeds to build a 3.2% position in Phoenix Group, a consolidator of life insurance companies.

The UK and European life sectors contain a large number of closed-book funds, no longer writing much, if any, business and typically running-off to the point where the last policy matures. This can be years or decades away.

Phoenix exists to consolidate these orphaned assets onto their low cost administration systems, reducing the cost of operations and allowing the reserves within the funds to be released over time, to the benefit of shareholders.

The result is a highly cash generative business model with excellent dividend-paying potential. The company pays two equal biannual dividends each year, which grow as and when the business acquires new portfolios of business. The current yield is 6.5% (variable, not guaranteed and not a reliable indicator of future income).

Phoenix acquires its assets at a discount to their fair value, because the owners are struggling to manage them efficiently, or because they wish to redeploy the capital committed into other areas of their business. Opportunities to acquire are plentiful.

Big catch

Phoenix recently completed a deal with Standard Life Aberdeen (SLA) that has given them a major increase in scale and future cash generation. SLA have taken a 20% stake in Phoenix with the balance of funding provided by new equity and debt. Phoenix have ended up with most of the non-fund management businesses of Standard Life, with long term agreements between the two groups covering future business. Thus Phoenix should see some ongoing new business flows from the SL businesses acquired.

Phoenix paid a total of £2.93bn and the acquired assets are expected to generate £5.5bn of future free cash, the difference explained by discounting the timing of the flows.

With a strong balance sheet and cash flows underpinned by the recent Standard Life deal, we believe Phoenix could be a reliable dividend-payer for many years to come.

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