From Dawn to dusk

After a dismal 2018, I would have preferred to kick off the year on an optimistic note. Yet I cannot deny my morbid curiosity about developments at building supplies conglomerate Distribution & Warehousing Network (Dawn) over the past six weeks.

Initially, I thought the 1c a share (or R5.8m) buyout offer from Polanofield — a company involving former Dawn CEO Derek Tod — was a highly opportunistic pitch, and one that could spur other bidders with higher offers. In fact, I snapped up a few shares at 2c.

Officially Polanofield’s offer was pitched at an 80% discount to the 5c a share 30-day volume weighted average price of a Dawn share prior to the release of a cautionary notice. Polanofield’s offer also heavily discounted Dawn’s last stated tangible NAV of around 90c a share given in the year to end-march results.

Understandably, more than a few market watchers were keen to read the independent expert’s “fair and reasonable” pronouncement on the Polanofield offer. Even though the recently released interims reflected a much-reduced tangible NAV of 12.7c a share, a fair and reasonable pronouncement of a 1c a share offer was going to make intriguing reading. I was astounded to read in the holidays that BDO Corporate Finance determined there was zero value attributable per scheme share after taking into account Dawn’s outstanding liabilities and commitments. I have never seen such a pronouncement before.

On this basis the offer was seen as fair and reasonable — what with Dawn regarded as being in financial distress. BDO added that the core valuation resulted in a negative equity value of R48m. BDO also noted that a competing offer for Dawn might be tabled — not that surprising, since the initial offer documentation indicated awareness of other parties expressing an interest.

But enthusiasm should be tempered, especially in view of the interim commentary by CEO Edwin Hewitt. Most significant was his admission that the NAV “could further reduce due to the cyclical nature of Dawn’s business, with December and January being historically slow months”.

This comment can’t be taken lightly, with Dawn’s NAV reducing by more than 85% from September 2017. That is a frightening value burn, particularly because Dawn appeared to have bought itself ample breathing space after a R350m rights offer in April 2017 and the sale of its 49% stake in Grohe Dawn Watertech for R324.5m in early 2018.

Dawn has a R140m loan outstanding with Absa and another R31m in terms of other borrowings.

The bottom line is that Dawn is not generating enough cash flow to cover operating expenses, capital expenditure and working capital requirements. Banks are probably not going to lend to it at this point, and long-suffering shareholders won’t be enthusiastic for a(nother) rights offer.

False dawn?

What is puzzling, though, is a change in the irrevocable support for the Polanofield offer from some major shareholders. The Sens announcement of December 3 claimed irrevocable undertakings of support from 60% of Dawn’s shareholders.

The subsequent circular, however, showed irrevocable undertakings of 38.16% — being Ukhamba (21.18%) and RAC Investments (16.98%). By inference, that suggests Coronation (20%) and Investec (6%) have not provided irrevocable undertakings. Asset managers don’t usually hold onto shares in unlisted companies, and it would be unlikely for Coronation or Investec to stay on board after the proposed delisting.

Having said that, Dawn’s board does indicate that if Polanofield takes over the company it would facilitate the required revenue volume growth to cover the high cost base as well as further improvements to reduce the fixedcost base. For me, this puts the 1c a share offer into perspective.

The bottom line is that Dawn is not generating enough cash flow… Banks are probably not going to lend to it at this point