Waste not, want more

Why should En­vi­roServ mi­nori­ties be squeezed out?

Finweek English Edition - - The Company You Keep - MICHAEL COUL­SON coul­sonmh@gmail.com

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.

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