Negotiations with Seedcorn proceed quickly. Seedcorn has lost its way and the family shareholders are eager to do a deal.
For Country Bumpkin the opportunity to acquire 36 sites in the South East is too good to miss. The companies agree a deal worth a total of £8m, payable in cash and shares. Shareholder approval is not required, as this is not a reverse takeover.
Country Bumpkin needs £4m cash to pay the Seedcorn shareholders. It has recently raised £5m in a rights issue but that is already spoken for. Alan does not want to dilute share capital by issuing more ordinary shares for cash, so he decides to borrow the money instead.
The device he uses is debenture stock - securities issued by the company which carry a fixed rate of interest and are redeemable at a specified future date. Debenture stock is usually medium or long-term debt, and in CB's case the £3m raised from institutional lenders is repayable over 10 years.
For the lenders, the debenture stock is a relatively safe investment. The debt is secured on CB's property assets, and if CB fails to pay the interest, the lenders can appoint a receiver, sell the property, and collect their money. The debenture stock is also tradable in its own right, so the lenders can, if they want, sell it on to other investors.
From the point of view of ordinary shareholders, the issue of debenture stock is relevant because, although their equity in the company is not diluted, the company will have to be careful that it can service the debt (i.e. pay the interest). If things go belly up at CB, ordinary shareholders know that they stand last in the queue, way behind debenture stock holders.
The other half of Seedcorn's payment is made in Country Bumpkin shares. CB issues 1 million new shares, accompanied by a vendor placing. The Seedcorn shareholders sell their CB shares to institutional investors in a prearranged deal for slightly less than the current share price.
The significance of the vendor placing is that if the Seedcorn shareholders decided to sell their shares on the open market it would have depressed Country Bumpkin's share price. By selling a large block to an institution the price remains stable.
From the shareholders' point of view, the deal has caused some dilution overall because a million new shares have been issued. It has also increased CB's gearing - its debt as a percentage of its equity capital - but at 25% gearing is still low by industry standards.
The deal transforms the City's perception of Country Bumpkin. Here is a firm that has demonstrated an ability not only to grow
CB is now definitely a growth stock. The mouthwatering thing from your point of view is that the share price is being pushed up by two factors:
When you last looked its share price was 300p on eps of 14.3, which is a P/E of 20.9. If eps rises to, say, 20p and the City decides that for a company growing this fast a P/E ratio of 25 is more appropriate, that share price could leap to 500p.
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