Give us the facts

Mustek an­nounce­ment as clear as mud

Finweek English Edition - - Companies & markets - BY MICHAEL COUL­SON

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

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