Cheeky but serious
Some punters paid the price for optimism at troubled building supplies conglomerate Distribution and Warehousing Network (Dawn) when they caught sight of a cautionary in midnovember. The cautionary, which sparked rumours of a pending buyout or takeover, bumped the share from 5c to 9c. Then came the harsh reality.
Former CEO Derek Tod is involved in a buyout bid pitched at a princely 1c a share. The 1c-a-share pitch is hard to credit, especially pegged against the “hard” NAV of more than 50c a share at the end of March.
At first glance the 1c offer was dismissed as an insultingly cheeky bid.
But further reading of the bid announcement showed 60% of Dawn’s shareholders had already given irrevocable undertakings to support the low bid. The bid values Dawn at R6m — astounding when one remembers that the group held a market capitalisation of over R3bn as recently as 2015.
Adding further colour to this desperate backdrop is the fact that Dawn has given Polanofield, a company controlled by Tod and Luis Baeta, a 120-day exclusivity period during which the group cannot accept a competing transaction or “solicit, initiate, encourage, approve or recommend any expression of interest, inquiry, proposal or offer regarding any competing transaction”. This, on the face of it, seems a tad prejudicial to shareholders having to consider an offer of 1c a share — especially when directors confirm they are aware of other parties that have expressed an interest.
Dawn is also allowing Polanofield the right to communicate with staff, customers and suppliers, and will “use its reasonable endeavours to assist” with the preparation of its proposed enhanced business plan, as well as with negotiations with Dawn’s banker.
According to Dawn’s just-released interim report: “Derek and Luis have extensive experience and expertise in the wholesale trading environment and offer a relationship differential that can strategically take Dawn forward from the base that has been created by Dawn’s current management.”
Dawn also argued that Tod and Baeta would facilitate the required revenue volume growth to cover the high cost base as well as further improvements to reduce the fixed cost base.
“It provides a reasonable prospect of success which cannot be achieved through the current structure or through implementing any of the options that the board has previously considered as viable alternatives.”
Continued support
That’s quite a capitulation by the board, which also noted that — aside from the support from major shareholders for the proposed buyout — Dawn’s bankers, credit insurers and landlords have also shown their continued support throughout the transition process. At this point there are buyers — in some decent volumes — for Dawn’s shares at 2c a share. This seems illogical as a higher offer seems highly unlikely to materialise (at least any time soon).
The interim results show tangible NAV has been reduced to under 13c a share, with directors warning that this number could further reduce due to the cyclical nature of Dawn’s business — December and January are historically slow months.
But some punters, and I include myself in this bunch, might see merit in trying to forego the 1c-a-share offer and rather hitching a ride in an unlisted Dawn. Tod knows his way around Dawn and the building sector, and he must be envisaging a leaner and meaner Dawn finding profitable traction.
That may be an arduous and frustrating process, especially in an unlisted vehicle. But in years to come Dawn — which still owns some well-regarded operations — could be worth much more than R6m, or (I’d say) R12m.
I recall that punters who stayed aboard unlisted retailer Homechoice (which was buckling in 2002) were richly rewarded in later years.
Perhaps I’m being overoptimistic?
Tod knows his way around … and he must be envisaging a leaner and meaner Dawn finding profitable traction