A LESSON TO MINORITIES
the most controversial minority buyout and delisting in the wake of the late Nineties listings boom was executed by catalogue retailer HomeChoice in 2003. Between 2000 and 2003 there were a great number of minority buyouts and delistings, mostly pitched at prices that heavily discounted the intrinsic value of the respective businesses.
Those would include Abacus Technology, Gray Security, Macadams Bakery Supplies (which, ironically, has now re-listed as part of Universal Industries), First Lifestyle Holdings, Softline, Servest, MDM Growth Investments, MB Technologies, Smacsoft, Arcay, Chester, Carson, Fedics, Wescape, Alacrity, Moresport, Maxtec and Forza.
But HomeChoice was the standout buyout in terms of pure gall and unbridled opportunism. Basically, HomeChoice CEO Rick Garratt pitched – via a family trust – a controversial 18c/share buyout offer to minorities in late 2002 when the group’s performance was suffering from the general deterioration of the mass credit environment.
The 18c/share buyout offer valued HomeChoice at just R25m when a number of professional investors reckoned the group was worth five times that. There was even talk that around 100c/share in value could be secured if HomeChoice simply collected its debtors book.
There was a good deal of resistance from shareholders – both retail and institutional – to the buyout offer. But resistance was futile, because the Securities Regulation Panel (SRP) allowed Garratt – who was effectively steering the buyout offer – to vote on the scheme of arrangement. The one concession was that minority shareholders were given the option of staying on board the unlisted HomeChoice. Naturally, institutions that managed money on behalf of third parties (Coronation being the most prominent) were forced to bail out at 18c, which meant only a few die-hard minorities opted to remain on board the listed vehicle.
But then any doubts that HomeChoice represented significantly more than the buyout offer were confirmed when RMB’s Equity Capital snapped up a 27% stake in HomeChoice by buying shares on the open market at a sizeable premium to Garratt’s buyout offer price.
Roughly two years later, Equity Capital made a nice turn when they sold back their shares to HomeChoice for around 180c/share as part of a share buyback exercise.
Another startling statistic is that the R56m spent by HomeChoice in 2005 on buying back shares was twice the market capitalisation of the company at the time of delisting.
Finweek has a copy of HomeChoice’s most recent audited financial statements (to endDecember 2007) and they confirm just how well the Garratt family has been rewarded for its opportunistic effort. Bearing in mind the Garratt family’s buyout offer valued HomeChoice at R25m (18c/share) in 2003 it’s fascinating to note dividends declared since delisting from the JSE already total 16c/share.
Tangible net asset value has grown from 136c/share in 2003 to more than 400c/share, while the balance sheet carries no gearing. Turnover is now well clear of the R400m mark and well clear of the R273m notched up in financial 2003.
Since 2003, HomeChoice has generated more than R340m in earnings. Not bad for a business supposedly worth R25m. However, most impressive are the cash flows generated since 2003, topping R64m at the end of 2007. HomeChoice’s cash balances at end-2007 stood at a reassuring R74m (equivalent to more than 70c/share).
Perhaps when HomeChoice, which has been buying back its own shares, has shed the last of its pesky minority shareholders there will be a bumper dividend payout?
Meanwhile, Finweek notes cash-flush HomeChoice has paid R28m for an office building that will be redeveloped as a new head office for the group.
A nice business… if you can get it!