Give us the facts
Mustek announcement as clear as mud
THE INITIAL announcement of Mustek’s plan to buy out minorities in its Rectron subsidiary is so defective that I’m surprised its advisers – and, for that matter, the JSE – allowed it to go out.
The main problem is that it doesn’t tell us how the deal is to be paid for. We are told the initial consideration is R49,8m, and as there’s a reference to certain share prices, we must assume this will be met by the issues of shares. But this point isn’t made explicitly.
And we’re not told – and on the information given can’t calculate – how many shares will be issued, though there’s a pro forma statement of the transaction’s financial effects that can only have been prepared with this knowledge.
The pro forma statement assumes the transaction took place on 1 July 2006 for income statement purposes and 31 December 2006 for balance sheet purposes, and that the share price was 1 025c on 1 July and 917c on 31 December.
So maybe, if we divide R49,8m by 917c, we can infer that about 54,3m shares are to be issued. But even that isn’t clear, as there’s a potential further consideration of R46,8m if certain “milestones” are reached over the next five years.
How this is to be financed, and what account was taken of it in the pro forma statement, we simply don’t know, either.
Now this is considered a related-party transaction, so it will require shareholders’ approval, and the formal documentation will have to contain all this. But these are such basic matters and could have been included in just a couple of additional sentences in the preliminary announcement, that their omission is most regrettable.
And while I’m sure the deal makes sound business sense, there’s one condition at which minorities may raise their eyebrows. One of the vendors is identified as a Mr H Lu, who is a director of Rectron and presumably closely related to Rectron founder and CEO Mark H Lu.
This Mr Lu is to be granted voting rights of 25,1% in Mustek for either five years or until the final payment is made by Mustek to the sellers. That will give him the ability to block any special resolutions requiring a 75% majority vote.
One can understand that the vendor of a business – even a substantial minority interest – wants some safeguards over its future direction. But at its present 1000c share price, Mustek is valued at just over R1bn. So the value of phase one of this deal is less than 5% of its market cap, and even if the second leg goes ahead it’ll still be less than 10%, depending on the then share price.
Is it reasonable that a vendor of a minority interest in a subsidiary should be given such a right of veto at holding company level? Again, we will have to await the motivation.
* The writer holds shares in Mustek