Wey – Wrap up

I have written more about Wey Education than any other subject here and it was my number one holding for the majority of the last three years. The combination of a high portfolio weighting and strong share price performance means that it made me more money than any other investment during the period. I hope readers did well too.

The last time I attempted a valuation was on 10th November 2020, when I said:

Risks have however risen with the failure to distribute profits and talk of M&A. Accordingly I have increased the discount rate used in my NPV calculation reducing valuation to 55p. I hope to revise this following Wednesday’s results presentation.

In fact the results presentation suggested a lower risk of them making a value destructive acquisition, but not, as I will get to shortly, of them being acquired on the cheap.

The next update we got from the company was a trading update in January. As well as confirming it would exceed profit forecasts, they reported that their InterHigh unit would “henceforth” start charging VAT to UK clients. Although I had previously flagged up the VAT issue and had done some basic modelling for this eventuality, the detailed implications are extremely complex. I prepared a long article explaining the intricacies, and concluding that my model now showed difficulty in meeting revenue forecasts on a reported “net of VAT” basis. However my information was that no VAT invoices had actually been issued for existing customers, putting the whole basis of the article and modelling in doubt. For this reason it was never published.

We know from bid documents that were briefly published on the Wey’s web site that a formal bid approach was then received from Inspired Education on 18th February, five weeks after that trading update. It may be that the apparent delay in charging VAT was at Inspired’s earlier request:

The bid, recommended by management, was eventually announced on the 1st April, with a cash consideration of 47.5p a share.

While this was a significant premium to the then-prevailing share price, in mid-January people were paying 41p and it was a significant discount to my own valuation, which was in turn very conservative. So, what were the likely reasons for this?

Prevailing Share Price

In my opinion a major factor in the modest market valuation while the bid was being negotiated was the “Barrie Whipp discount” caused by his much documented antipathy towards private shareholders, combined with coordinated director sales in June 2020. When asked about these sales below 30p the Chairman said:

During the period in which we sold there was very strong small investor demand for the stock, leading to quite volatile conditions in the market.

FY 2020 Results Presentation

…which I think is as close you’ll get even Barrie Whipp to saying “we sold because small investors drove the price up to silly levels”, presumably missing the irony here was that many of these “small investors” had bigger positions than himself.

Of course it is possible that management did not realise how strong current trading was until later, but would an observer really believe this given the overwhelming evidence, as I wrote up at the time, to the contrary?

The timing of the bid also came in the lull between the trading update and the H1 results.

Motivation to Sell

A (relatively) low share price and a management underappreciation of the a company’s virtues does create the risk of an undervaluation in a takeover situation, but why sell at-all? Normally the bias is, if anything, for the board to want to keep their jobs by remaining independent. And from a business perspective it certainly seemed that Wey had been doing very well by itself had every prospect of continuing to do so.

Of course the shareholders are key here. I have a note that on 27th January the shareholders were:

14% – The estate of the late Executive Chairman, David Massie
7% – The founders – CEO Jacqueline Daniel and her husband
7% – Unicorn VCT
35% – Significant institutional holders
36% – Other Shareholders

Jacqueline Daniel joint-founded both operating companies as private not for profit companies. After these were bought by Wey under the executive chairmanship of David Massie she attended shareholder meetings and talked passionately about the businesses, despite not being on the board. She was the reason why I first invested in Wey Education.

Following the death of David Massie she was a natural choice to become CEO, but always gave the impression of being a reluctant one, leaving newly appointed Chairman Barrie Whipp to dominate in meetings and issue statements. She has also repeatedly sold down her shareholding.

Barrie Whipp is founder and executive chairman of another company, Crimson Tide, where he has enjoyed a generous salary for many years, but with little return on his original shareholding. In contrast, at Wey he was on a very modest salary for the amount of work he was doing. As described earlier, he did not appear to value Wey highly, but together with the CEO made a significant contribution to a quadrupling of the share price in little over two years.

Barrie Whipp is on the record as saying:

…we had three-year tax investment funds… 
…I can tell you that the institutional shareholders are universally supportive of the strategy as is the family of David Massey, to whom I’m close and have been for a long time…

FY 2020 Results Presentation

So we have:

• management who apparently think the company is overvalued,
• a natural seller in the form of the Massie estate,
• ditto for VCT(s) that bought in the November 2017 placing with three-year money,
• a CEO who doesn’t appear to be comfortable in the role and has been a long-term seller
• an underpaid Chairman with a minimal shareholding and significant influence over the majority of shareholders, and
• a deal that would (with justification) look great on the Chairman’s CV.

What did private shareholders expect to happen?

Footnote

It is disappointing the Jacqueline Daniel has missed out not only on a higher price for her shares, but also somehow yet again got nothing in the honours list. She (with her husband) have transformed primary and secondary school education in the UK and made a direct difference to 10,000s of children’s lives over many years but especially during the first lockdown when many other schools abandoned teaching entirely.