Waste not, want more
Why should EnviroServ minorities be squeezed out?
HERE WE GO AGAIN. Yet another case of management colluding with private equity to rob outside investors in a company of future growth. This time it’s EnviroServ, where what amounts to a consortium of management and Absa Capital Private Equity is to offer 1660c cash per share, plus a special dividend of 35c. Bidvest and Zader Investments are committed to support the bid. While Bidvest has a 30,2% stake and Zader 7,9% – adding up to 38,2% – we’re told that for some arcane reason they control 49,5% of the aggregate voting power.
Executive chairman Alexander McLean has a 20,8% equity interest, so that’s pretty much a done deal. Current holdings of other directors have not been disclosed yet and the most recent annual report on EnviroServ’s website is for financial 2006. (In an age in which the web is increasingly used as the primary source of information, it’s alarming how many companies don’t keep their sites up to date.) However, directors of EnviroServ and its subsidiaries have been active traders in recent months.
Though not all transactions have been buys, on 28 March McLean bought 50 000 shares at 1215c each. Similar deals were put through the same day by CEO Des Gordon, financial director Raymon Rocher, company secretary O Deftereos, directors Delia Lavarinhas, Edwin Motebang and Esme Gombault, and subsidiary director KM Geoghegan.
The only pseudo-justification for the bid is that soon after the scheme is implemented, a 20% black empowerment partner will be introduced. That is irrelevant, as many companies have brought in empowerment partners without forcing out minorities. Moreover, while the announcement trumpets that the offer is at a 42% premium to the market price at the time of the cautionary announcement and a 36,5% premium to the weighted average for the past 30 trading days, that may be prejudicial to the price the new empowerment partners will pay.
The historic multiple on the offer price is 17,3, but interim headline earnings per share increased 30%, so that could fall sharply when the prelim, scheduled for 22 August, is published.
In fairness, the previous record price was 1475c/share on 4 December 2007, so the offer is in uncharted territory. But the buyers by definition must think the company is worth even more – so why should minorities who have supported them over the years be squeezed out? Perhaps the formal offer documents will try to justify the transaction, but so far it looks like just another instance of directors and management putting their own interests before those of outside shareholders.
Sadly, this sort of thing is likely to become more common. After all, the way to make money on the market is to buy cheap and sell dear. That's true for everyone, not just investors. It’s why most flotations occur when markets are near peak and owners of private companies think they can sell interests at more than their real worth; conversely, when markets are depressed, minorities can be bought out for less than their shares are worth. We saw that after the great share market boom of the late Sixties and after the IT boom of the late Nineties.
It’s just come around again a little more quickly than might have been expected. And during both the distribution and accumulation phases, investment bankers seize the opportunity for both fees and trading profits. So EnviroServ won’t be the last instance of its kind; which doesn’t make the practice any less objectionable.