Published Date: 2021-07-30 | Source: INCE|Community | Author: The Finance Ghost
In this article, I will try to address some of the questions raised. Although you should all know this, I must reiterate once again that this is not financial advice. I am able to clarify certain points and I've put forward my opinion in a couple of places, but ultimately the decision is yours and will depend on your own risk tolerance and personal circumstances.
I also want to stress that absolutely nobody knows what the "right" answer is. There are many variables in this deal. We cannot be sure what the Huge share price will do next week. We don't even know when the Volaris offer will close (or if it will).
I genuinely don't envy any of you in this decision, although I do envy the wonderful year-to-date return you've achieved in your Adapt IT investments, assuming you bought your shares this year.
This is an excellent question.
Volaris has indicated that they may walk away from the deal if they can't secure a controlling stake in Adapt IT. This is typical in transactions like these because companies want to control their investments and extract value accordingly. If you don't hold more than 50% of the voting rights in a company, you don't control it.
Huge appears to have no such issues. Although Huge would love to control Adapt IT, my understanding is that the company is quite happy to own a portfolio stake in Adapt IT i.e. a non-controlling stake. This is odd for me because I'm unsure how they plan to obtain any benefits from this.
It's also not clear to me what would happen during the subsequent Volaris process. Huge will own a portion of Adapt IT and will presumably not accept the lower cash offer from Volaris, or value will be destroyed for Huge shareholders instantly.
This suggests that Huge is quite comfortable with potentially holding a non-controlling, unlisted stake in Adapt IT when all is said and done. I unfortunately don't have a good answer for what the intent with that might be.
Concerns regarding Huge Group's liquidity and share price
Huge is a small cap (ironically, given the name) with a market cap of R905m. According to tradingview.com the average volume is around 76k per day which is around R450k value traded per day in round numbers. If you have a small stake then that's not a massive concern but large stakes need to be careful.
Overall, there are certainly more illiquid shares on the JSE. With a bit of patience, most investors could sell with the volumes in Huge.
The relative illiquidity can result in a volatile share price. The reference price for Huge shares in the independent expert report (read it here
) was R6.65 but the share has traded around R5.20 recently before a strong rally yesterday took it to R5.90.
The share ratio is fixed (1.37 Huge shares for every Adapt IT share) so the original reference price worked out to an offer of R9.09 per Adapt IT share. At the current Huge share price, the offer works out to just over R8 per Adapt IT share.
This will change by the time the deal actually settles. This is one of the challenges in a share-for-share deal vs. a cash deal. It's a moving target.
Timing of the Volaris offer (or lack of clarity thereof)
From what I've seen on Twitter and in various comments from investors, this is the main point in Huge's favour.
As things stand, there is no clarity on the timing of when the cash from Volaris might be paid to shareholders. There are many regulatory hurdles to get over and the entire thing could still fall over if at least 50% plus 1 of the shareholders don't accept the offer. It doesn't help that the latest SENS announcement from Adapt IT was an indication of further delays to the deal as conditions relating to executive contracts haven't been met.
I doubt the cash would be payable this year, so investors would likely be holding out until 2022 to receive R7 per share in cash.
If I was a betting man...
I can only speculate here, but I think Huge might be pleasantly surprised by the number of acceptances, purely because Adapt IT shareholders could be attracted by the relative certainty and higher "price" for their shares. This is the narrative I've seen on Twitter.
I'm putting "price" in inverted commas because everything then depends on Huge's share price after the deal. If it rallies or even stays where it is, Adapt IT shareholders can either stick around in Huge or sell in the market and realise a better price than the Volaris offer.
If the Huge price drops sharply, then the outcome may not be so favourable.
I suspect Huge will come under significant selling pressure next week as people accept the offer and try to exit straight away.
I'm not an Adapt IT shareholder. If I was, I would seriously consider taking the Huge offer and waiting a couple of weeks before selling. At a ratio of 1.37 Huge shares for every Adapt IT share, Huge's share price has to drop to R4.87 for investors to be break-even vs. the current Adapt IT share price.
That would require a 17.7% drop in Huge. In making this decision, you need to decide for yourself how likely such a drop could be and then weigh that up against the risks in the Volaris offer as well as the impact of the time value of money.
It's not an easy decision!
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