Brave Bison and Mission Group in bid talks: what should shareholders do?

London-based social and digital media group Brave Bison (BBSN:2.5p) has announced a possible all-share offer for UK advertising and marketing specialist Mission Group (TMG: 24p).

The indicative offer of 11.5 new Brave Bison shares for every one share held in Mission values the company’s equity at £26.7mn (29p), a discount to its last reported book value of £76.5mn (85p). In the 2023 financial year, Mission reported a drop in underlying cash profit from £12.1mn to £10.6mn, but house broker Canaccord Genuity is forecasting a recovery to £13.1m in the current financial year.

Effectively, the offer values Mission on a multiple of four times prospective cash profit to enterprise valuation of £54.5mn, after factoring in net debt and certain acquisition and HMRC liabilities outstanding at 30 April 2024. It would mean that Mission’s shareholders would hold 45 per cent of the shares in the combined group even though the company accounted for 71 per cent of the proforma combined cash profit of £14.9mn in 2023.

It would be dilutive for Mission’s shareholders, so it’s hardly surprising that the directors rejected the offer as undervaluing the company. However, I can see the strategic rationale for combining the two entities to create a £59mn market capitalisation group that has greater scale, and could generate financial and operational synergies through efficiencies, removing duplicated costs and cross selling opportunities.

Moreover, having refinanced its borrowings for another two years, Mission Group is aiming to use cash flow to half net borrowings by the end of 2025. However, Brave Bison’s directors have indicated that they would use their company’s net cash pile of £6.8mn and are considering raising £10mn through an equity fundraise to deleverage Mission’s balance sheet immediately, a catalyst for a higher rating by lowering financial risk.

So will the two companies combine?

It’s worth noting that Mission’s directors are open to proposals that would enhance shareholder value and deliver benefits to its own shareholders. It leaves the door open as Brave Bison engages in talks with Mission’s board and major institutional shareholders, both of whom would have to be on board for any deal to be agreed. There is also the possibility that Brave Bison’s approach could flush out interest from other bidders attracted by Mission’s recovery potential and low rating.

So, having placed buy recommendations on both companies when I recently covered their respective annual results, I continue to feel that their shares are undervalued and are worth buying at the current level. Even though Mission’s earnings are expected to recover this year and the board is looking to pay down debt, the company is priced on an enterprise valuation to cash profit multiple of 3.6 times and prospective price/earnings (PE) ratio of 3.9 for the 2024 financial year.

Brave Bison’s track record is more impressive in recent years, hence why its shares enjoy a higher enterprise valuation to cash profit multiple of 5.9 times, and trade on a cash-adjusted PE ratio of 7. Buy.

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