WHSP Puts Its Overvalued Shares to Work in Milton Acquisition; FVE Increased 9%

We upgrade our fair value estimate of no-moat Washington H. Soul Pattinson, or WHSP, by 9% to AUD 23.10 following its proposed merger by scheme of arrangement with Milton. Under the terms of the deal, WHSP will buy the remaining 97% of Milton that it does not already own and will finance the transaction using its own scrip. WHSP will pay a 10% premium to the underlying net tangible assets, or NTA, held by Milton. This premium is more than offset by WHSP being able to finance the transaction with its own presently overvalued scrip, which we estimate was approximately 43% overvalued prior to the announcement of the deal. Immaterial cost synergies are associated with combining investment houses. Therefore, our valuation uplift is derived solely from the net-benefit WHSP shareholders derive from paying for Milton’s assets with overvalued WHSP shares. In turn, we increase our fair value estimate for no-moat Brickworks by 6% to AUD 22.30 per share. Brickworks is WHSP’s largest shareholder.