Roll up, roll up! Discuss the ASX roll up stocks

[skc]

The roll up play is an interesting business model on the ASX. The development goes something like this.

1. Company lists with some core asset in a "cottage" industry.
2. Company acquires private businesses in the same industry, by issuing shares or cash/debt.
3. Acquisitions are made at a lower multiple than the listed copmany itself.
4. As scale grows, comapny can potentially enjoy better operational leverage and hence higher margins.
5. This leads to EPS growth.
6. Rising EPS attracts higher earnings multiple for the acquirer, and hence more capital (again, shares or cash/debt) available to make further acquisitions.

This model is found in quite a few industries, some more obvious than others.

Childcare: ABC, GEM, AFJ
Education: VET
IT: PGA (now EGG), RXP
Healthcare: RHC?, SHL, CAJ
Financials: IFL, CUP, AUB, SDF
Others: IVC (undertaker), GXL (pet care/vet clinics), ONT (dental surgeries), SGH (legal services)

Some of these businesses failed, some of these businesses thrived. So let's this thread be the discussion point for these business. It can be company-specific discussions, discussions about the various industries, companies to add to the list, and investment approaches/opportunities etc.

If you have such companies in your portfolio, share your thoughts on them.

cheers

P.S. Two other articles on this topic.
http://www.fidelity.com.au/insights-centre/investment-articles/why-asx-listed-roll-ups-are-thriving/

http://www.fool.com.au/2014/01/29/6-top-rollup-companies-for-your-watchlist/

 

[Wysiwyg]

Information, Communication and Technology - UXC Limited

Five acquisitions last Financial Year. My opinion - don't know what the truth is under the presentation spins and suggest the numbers are a better indication. Wonder whether acquisitions are to kill the competition or integration is actually being successful.


Opinion only and people should not be influenced to make decisions.

 

[Craton]

Hi skc,

I’ve one financial holding, BKI, doing the same. My take is that it is part and parcel of doing business whether a private or public company, one would think that the purchaser would be buying because the purchase would add to the bottom line AND provide other synergies as well.

Growth for growths sake and paying a premium don’t sit well with me however, BKI’s prudent approach is most appealing as I think it shows/proves BKI's professional integrity.

On another note I wonder, would a reverse takeover be considered a roll up as well?
QNA comes to mind as it started life as a gold stock pre Dot Com bubble days and has had a couple of reincarnations (LVN>WSY>QNA) since those days.

Mnenon, MNZ, is another with a reverse takeover from the acquisition of Grays Online.

 

[Huskar]

It's an interesting thread SKC but hard to say anything meaningful!
All I know is that its a fairly straightforward "arbitrage" (obvs not riskless...) when you can buy a childcare centre at 4x EBITDA with stock that is priced at 10x.

For international lesson look no further than Henry Singleton with Teledyne (http://seekingalpha.com/instablog/3...der-henry-singleton-founder-of-teledyne-audio) or Ted Malone with Liberty Media - financial genius with these and very interesting examples.

The key difference is that Henry and Ted were able to have the discipline to change tacks when stock was not so well priced and strategy no longer working - will GEM be able to do the same? We will see... Until then "As long as the music is playing, you've got to get up and dance!"

 

[skc]

Information, Communication and Technology - UXC Limited

Five acquisitions last Financial Year. My opinion - don't know what the truth is under the presentation spins and suggest the numbers are a better indication. Wonder whether acquisitions are to kill the competition or integration is actually being successful.

IT consulting is a popular consolidation play, although it is not really a scale game. You can only really charge out a maximum hours per week per employee... and it doesn't scale beyond that.

I’ve one financial holding, BKI, doing the same.

Craton, I don't believe BKI is a "roll up" stock. It's a listed investment company having passive stakes in various listed companies.

On another note I wonder, would a reverse takeover be considered a roll up as well?
QNA comes to mind as it started life as a gold stock pre Dot Com bubble days and has had a couple of reincarnations (LVN>WSY>QNA) since those days.

Mnenon, MNZ, is another with a reverse takeover from the acquisition of Grays Online.

Reverse takeovers are also very different. It simply refers to how the company comes to ge listed, and doesn't really inform anything about the nature of the company.

It's an interesting thread SKC but hard to say anything meaningful!
All I know is that its a fairly straightforward "arbitrage" (obvs not riskless...) when you can buy a childcare centre at 4x EBITDA with stock that is priced at 10x.

For international lesson look no further than Henry Singleton with Teledyne (http://seekingalpha.com/instablog/3...der-henry-singleton-founder-of-teledyne-audio) or Ted Malone with Liberty Media - financial genius with these and very interesting examples.

The key difference is that Henry and Ted were able to have the discipline to change tacks when stock was not so well priced and strategy no longer working - will GEM be able to do the same? We will see... Until then "As long as the music is playing, you've got to get up and dance!"

Thanks Hesking1. It's an arbitrage alright and investors can come along for the ride, especially early on.

I remember looking at GXL @ $1.50 and GEM @ $2 and simply dismissing them as boring industries with low growth and iffy business models. But the industry consolidation path is mighty long and those who execute well can generate a lot of shareholder return "as long as the music is playing".

 

[Craton]

Thanks for the feed back.

Craton, I don't believe BKI is a "roll up" stock. It's a listed investment company having passive stakes in various listed companies.

BKI has been acquiring albeit not aggressively, a couple from memory being Huntleys Investment Company in 2008 and more recently; see:

http://bkilimited.com.au/downloads/2014/BKI_InfoFlyer_FY2014_Final_Amended.pdf

Acquisition of Unlisted Investment Company
In April 2014, BKI completed the acquisition of all the issued capital
of an unlisted investment company with net assets of approximately

Reverse takeovers are also very different. It simply refers to how the company comes to ge listed, and doesn't really inform anything about the nature of the company.

Yeah, didn't think these met the roll up criteria.
Cheers.

 

[Ves]

Here's an American perspective written circa 2000:

http://www.strategy-business.com/article/16858?pg=all

Pretty good read and still pretty relevant.

 

[herzy]

Warren Buffett wrote about exactly this in his latest letter to shareholders...

 

[shouldaindex]

Anyone have thoughts on the child care rollup business model?

 

[skc]

Almost 3 years since this thread... much of the landscape has changed.

We've seen spectacular collapses in the likes of SGH and VET, de-rates in the Telcos (VOC, TPM), continued success in AUB, SDF, and new players in new and old industries like
- Travel agents: CTD, HLO
- IP law: IPH, XIP, QIP
- Outdoor advertising: APO, QMS, OML
- Car dealerships: APE, AHG, MTO (APE and AHG are not entirely new, but were left out in the original post).

Here's a good article on Roll Up and some of the dangers involved.

https://www.livewiremarkets.com/wires/four-hot-roll-ups-we-are-avoiding

 

[Knobby22]

Almost 3 years since this thread... much of the landscape has changed.

We've seen spectacular collapses in the likes of SGH and VET, de-rates in the Telcos (VOC, TPM), continued success in AUB, SDF, and new players in new and old industries like
- Travel agents: CTD, HLO
- IP law: IPH, XIP, QIP
- Outdoor advertising: APO, QMS, OML
- Car dealerships: APE, AHG, MTO (APE and AHG are not entirely new, but were left out in the original post).

Here's a good article on Roll Up and some of the dangers involved.

https://www.livewiremarkets.com/wires/four-hot-roll-ups-we-are-avoiding

I am always scared of roll ups so I didn't buy Slater and Gordon.

I do own two roll ups on the list though.
IPH which I bought after the fall. Still the same price as it is still out of favour buy I don't think they are buying any more businesses. This next financial statement will tell whether it will be become a winner or just another typical roll up failure.

The second one I own mentioned as a "Hot" roll up in the article is Costa Group. Again I think this company is a little different in that it is about a physical product: food such as avocado and is seeking to be a continuous supplier which should give it advantages. Hopefully they will be very careful buying any more businesses.

One thing weird about roll ups is the copy cat companies. Someone does IP then before you know it there are three. Someone does car dealerships, same thing. There are hundereds of outdoor advertising companies, what's the advantage of taking them over?? Travel Agents - pretty dodgy business these days. Why would you want to buy them up?

 

[skc]

I am always scared of roll ups so I didn't buy Slater and Gordon.

I do own two roll ups on the list though.
IPH which I bought after the fall. Still the same price as it is still out of favour buy I don't think they are buying any more businesses. This next financial statement will tell whether it will be become a winner or just another typical roll up failure.

The second one I own mentioned as a "Hot" roll up in the article is Costa Group. Again I think this company is a little different in that it is about a physical product: food such as avocado and is seeking to be a continuous supplier which should give it advantages. Hopefully they will be very careful buying any more businesses.

One thing weird about roll ups is the copy cat companies. Someone does IP then before you know it there are three. Someone does car dealerships, same thing. There are hundereds of outdoor advertising companies, what's the advantage of taking them over?? Travel Agents - pretty dodgy business these days. Why would you want to buy them up?

Roll up's are primarily about valuation arbitrage, and secondly about scale benefits. A lot of the professional service plays offer little in synergies aside from head office costs so it's hard to drive margin growth. But it helps management feel good about themselves.

The article has CGC as a hot roll up, but from my limited understanding I don't know if it is a true roll up play. It's move into avocado is more expansion into an adjacency, while agriculture itself is definitely a scale game...Personally I'd be more worried about price deflation across the berries range (observed as a lay person shopping in the supermarkets).... and yes the valuation appears to price in lots of growth and none of the cyclical downturn one would expect in a agri stock.