Is it worth sticking around after a delisting?
WHAT TRANSPIRES AT public companies after they delist from the JSE is something that can morbidly occupy the minds of investors for many a year.
Delistings — coupled to a take-out offer pitched to minority shareholders — often entail large shareholders with intimate knowledge of a business buying shares from minority shareholders who are frustrated or let down by the performance of the company or its shares.
There is often a sense that the insiders — who inevitably had sold shares in the business at a premium at listing — are now buying scrip back on the cheap with a reasonable degree of certainty that performance will improve and value will appreciate in the medium to long term.
Of course, these days most offers to minorities do include an option to stay aboard the unlisted vehicle. But this does preclude institutional asset managers, and probably a majority of ordinary shareholders that don’t want to be locked (trapped?) into an illiquid unlisted structure where the lack of public scrutiny might lead to lapses in corporate governance.
I am airing the question around delisted companies because the dour sentiment and dismissive ratings placed on the JSE’s small cap sector are bound to tempt controlling or influential shareholders to take advantage of the general market wariness by pitching buyout offers to weary minority shareholders.
There are some small cap companies — with unbroken profit records of more than five years — that are trading on low singledigit earnings multiples. Balance sheets would hardly be strained to buy out minorities at a decent premium to the share price, and existing cash flows would cover the cost of the exercise.
Investors who can afford to hang onto quality companies in an unlisted environment might do well over the long term.
I picked up one recent example “patience rewarded” in the recently released financial results of “deep value” investment company RECM & Calibre (RAC). The company recently confirmed it had sold its holding in services company Excellerate — which was quietly delisted from the JSE way back in 2012.
RAC disclosed it had sold its entire holding in Excellerate to a private buyer — turning an entry price of 123c into an exit price of 540c (which was also markedly more than RAC’s carrying value of 280c/share). While few investors would have paid much mind to the holding in unlisted Excellerate, the eventual exit price represented growth of 24% a year for the duration of the investment.
Bear this in mind the next time you need to decide whether it’s worth pursuing a quality small cap when it decides to shuffle off the JSE.