CELCOM AND KAY-DAV
THE PROPOSED buyouts of the operating assets in cellular services business Celcom and wood boards distributor KayDav Group illustrate wonderfully the opportunity for controlling executives to score from both the upside and downside of the JSE. It also – unfortunately – depicts just how minority shareholders can get horribly screwed. Not only are the executives behind the consortiums buying out the respective operating assets getting a great deal in terms of value, they were also able to make use of funds provided at listing by shareholders willing to pay what now seems inflated issue prices.
The statistics are rather revealing. Celcom raised R23m before listing in November 2006, when the company held a market capitalisation of R206m at a price of 100c/share. The buyout and delisting proposal sees minority shareholders being offered 50c/share to bail.
After Celcom’s (dare we say) “conveniently dour” trading update last week, the offer may well seem attractive. But Celcom’s price had dipped (at the time of writing) to under 30c/ share, which either represents a great jobbing opportunity or reflects considerable doubt the proposed buyout will actually materialise.
Although the buyout offer represents a considerable 56% premium on the share price before the scheme of arrangement was proposed, you have to consider the future potential of Celcom. For an effective price of R75m (R49m in cash, the balance in a share re-purchase), Celcom’s main executives will take back a group capable of generating R1bn in turnover at a fairly decent margin – with, as directors put it, “a strong balance sheet with little gearing, which would facilitate future growth”.
Easy money over the long term, it would seem…
In the case of KayDav, a consortium led by CEO Gary Davidson will pay R112m to acquire the main operating assets of the group in a deal to be settled by a share re-purchase (R28m), cash R38m and a R26m loan. The bottom line is that shareholders will effectively be offered a cash exit payout equivalent to 38c/share – but at the same time be offered a “sweetener” to remain on board, as the listed vehicle is set to facilitate a reverse listing of the Abalengani Group (with a R3bn property portfolio).
Ignoring for a minute the merits of the mooted Abalengani transaction, the 38c/share offered for the KayDav business by the consortium is a far cry from the 100c/share pitched to new shareholders ahead of the group’s listing in November 2007. The fact that the funds raised from shareholders at listing – a chunky R40m – represents more than 35% of the buyout offer should raise eyebrows. KayDav also produced 3,4c/share (roughly R10m) in interim earnings – but the group does earn more profits in its second half.
But before shareholders board up the KayDav business and open their arms to Abalengani, perhaps scrutinising the full-year results to end-December 2008 (which should be published before end-March) is a good idea.