Shareholders threaten to block Menzies-DX deal

Activist shareholder Gatemore Capital Management has written to the board of mail delivery firm DX Group threatening to block its reverse takeover deal with the distribution arm of Edinburgh-based John Menzies “if it is not markedly improved.”

Gatemore said it led a group of shareholders controlling 18% of DX’s shares who are demanding DX “either renegotiate the terms of the deal or terminate discussions.”

If the proposed deal went through, Menzies shareholders would own at least 75% of DX’s issued share capital and Menzies Distribution managing director Greg Michael and finance director Paul McCourt would become group chief executive officer and chief financial officer of DX.

“Together, as of today, we control approximately 18% of the ordinary shares of DX (Group) plc,” wrote Gatemore and other shareholders in their letter.

“We write solely in our capacities as shareholders in the company.

“We write together to clarify our objection to the proposed transaction with John Menzies plc and to state our intention to block the deal if it is not markedly improved.

“The proposed reverse merger grossly undervalues DX and its potential to recover from the current nadir in profits.

“We believe there are two main reasons why DX profits have fallen precipitously: (i) ongoing erosion in the Document Exchange and (ii) declining performance of DX Freight.

“While the former may be in a secular decline, we believe DX Freight presents meaningful upside to current investors if it were to be either sold or fixed.

“It is critical that current DX investors, who have watched the share price drop 90% and witnessed current management lose £200 million of value, realise the full benefit of a spinoff or turnaround of DX Freight.

“To consummate the current deal with Menzies and then address the problem with Freight afterwards will result in the current shareholders receiving only one-fifth of this benefit.

“DX Freight’s main competitor Tuffnells reported 8% operating margins for the 12 months to February 2017.

“By bringing DX Freight to even half of those operating margins, we estimate that DX can achieve annual EBITDA of £20-30m within two to three years – taking into account the ongoing decline in Document Exchange.

“This would result in a share price of 35 – 70p which would be far superior to our expected outcome of the current deal with Menzies, which not only relies on often-elusive synergies, but adds an unwelcome pension liability.

“In addition to the undersigned, there are a number of other shareholders who share these views.

“We demand that you either significantly improve the terms of the deal with Menzies or terminate discussions and allow the shares to resume trading.”