In­vest DIY: Deal­ing with delist­ings

An in­creas­ing num­ber of small- and mid-cap stocks are an­nounc­ing their in­ten­tions to delist. What does this mean for in­vestors hold­ing these shares?

Finweek English Edition - - Contents - By Si­mon Brown ed­i­to­rial@fin­

we are see­ing a spate of smal­land mid-cap stocks delist­ing, or at least an­nounc­ing in­ten­tions to delist. These in­clude Clover, Ver­i­mark and How­den Africa. In all three cases, at the time of writ­ing (22 Oc­to­ber), the com­pa­nies had is­sued Sens an­nounce­ments to that ef­fect, but no de­tails in terms of prices at which the delist­ings would hap­pen.

What this tells us is that there are some re­ally de­cent qual­ity small- and mid-cap stocks trad­ing at cheap val­u­a­tions. These cheap and qual­ity stocks are cer­tainly known, and the delist­ing surge is not un­ex­pected. And I think we will see a lot more delist­ings com­ing our way.

In re­al­ity, this is how a stock mar­ket works. When qual­ity is cheap, we as in­vestors are buy­ers. The dif­fer­ence with delist­ings is that the buy­ers want the en­tire com­pany and plan to take it off the JSE to be pri­vately held.

What this trend also in­di­cates is that we are likely close to a bot­tom in the small- and mid-cap space. But this state­ment comes with a caveat: “Close to a bot­tom” does not mean we are at the bot­tom. And just be­cause we are at, or close to, a bot­tom, does not mean the sec­tor will start roar­ing higher any time soon.

I have writ­ten be­fore that, typ­i­cally, large stocks run higher and when their val­u­a­tions get re­ally stretched, in­vestors start look­ing at smal­land mid-cap stocks, even­tu­ally send­ing their prices higher.

For in­vestors in the small- and mid-cap uni­verse, this spate of delist­ings is not good news as it forces us out of some qual­ity stocks at dis­counted val­u­a­tions, and re­duces the size of the in­vestable uni­verse. In time we will start to see a list­ing boom again, but this typ­i­cally hap­pens when over­all val­u­a­tions are stretched as the sell­ers (who are list­ing the stocks) get bet­ter prices.

The process of delist­ing

With a delist­ing, there is a process that has to be fol­lowed and that starts with the ini­tial cau­tion­ary. Com­pa­nies then need to an­nounce the pro­posed price at which the delist­ing will hap­pen and then share­hold­ers will get to vote. Im­por­tantly, the pro­posed price will be linked to the share price in the month or three be­fore the an­nounce­ment. Net as­set value will have no bear­ing on the delist­ing price.

The process re­quires an in­de­pen­dent board to con­sider if the pro­posal is fair – most of­ten this in­de­pen­dent board does just that. Ex­ist­ing share­hold­ers are then able to vote on the pro­posed delist­ing. If enough vote against the pro­posal, the delist­ing is ei­ther void or needs court ap­proval, de­pend­ing on the per­cent­age of share­hold­ers who voted against the deal. Most of­ten the delist­ing gets the re­quired votes, es­pe­cially as the price of the delist­ing is usu­ally at a pre­mium to the ex­ist­ing share price be­fore the an­nounce­ment. So share­hold­ers are able to make a quick 20% or so, al­beit the longer term po­ten­tial prof­its may have been much greater. As­sum­ing the vote passes, share­hold­ers will then be paid out into their trad­ing ac­counts with de­tails of the rel­e­vant dates be­ing an­nounced on Sens.

Keep­ing the back door open?

Some­times share­hold­ers are of­fered the op­tion to re­main in­vested in the com­pany as an un­listed en­tity. I al­ways re­ject this op­tion. Un­listed shares are ex­tremely illiq­uid, with no real price dis­cov­ery. They are al­most im­pos­si­ble to sell (un­less at bar­gain base­ment prices).

Fur­ther­more, be­ing listed adds an ex­tra layer of pro­tec­tion thanks to the JSE list­ing re­quire­ments. So even if of­fered the op­tion to re­main in­vested, I would take the money.

There­fore, while this spate of delist­ings might be no fun for in­vestors – as it re­duces our uni­verse of qual­ity and forces us out of some gems if the vote is passed – you are en­ti­tled to vote. So, share your view by vot­ing. ■

Some­times share­hold­ers are of­fered the op­tion to re­main in­vested in the com­pany as an un­listed en­tity. I al­ways re­ject this op­tion.

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