Published Date: 2021-06-15 | Source: INCE|Community | Author: The Finance Ghost
Bidding wars lead to plenty of regulatory paperwork being required, especially when there are two listed companies involved. These take the form of circulars, which are large and highly regulated documents released by listed companies and addressed to shareholders.
The target is Adapt IT, which is dealing with competing offers for the business while the CEO and founder is on special leave to deal with personal matters. Corporate deals like these are hard enough without the additional challenge of an absent founder.
In the red corner...
The cash bidder is Canadian group Volaris, which must have suffered a knock to its confidence after the Competition Commission's ruling on Burger King, which blocked a local empowered company from being sold to a non-empowered group. Nevertheless, Volaris is marching forward with a cash offer at R7.00 per share, up from the original offer of R6.50 per share.
A proposal at R7.00 per share is a 69.1% premium to the 30-day volume weighted average price (VWAP) of Adapt IT as at 26 January 2021, which was the last trading date before the fireworks began for Adapt IT.
Although this is a substantial premium even by buyout standards, R7.00 per share is at the lowest end of the range put forward by Nodus (the independent expert on the transaction) as being fair and reasonable. That range was R7.00 - R9.09 per share.
And in the blue corner...
Huge Group is the other bidder, a JSE-listed IT company. The company has made a share-swap offer, which would merge Adapt IT and Huge Group and issue shares in the merged entity to Adapt IT shareholders. The swap ratio at the time of the revised offer would equate to R9.09 per share, the top end of the Nodus range. Huge's original offer was much lower.
So, there is a cash offer at the lowest point in the range and a share swap offer at the highest point.
There are many circulars
If you go onto the Adapt IT website, you'll find a combined circular issued by Adapt IT and Volaris. The companies are collaborating because the Volaris offer is preferred by Adapt IT, hence why the board is proposing a scheme of arrangement to shareholders.
In a hostile bid, there is no scheme of arrangement available because such a scheme can only be proposed by the board. If the bid is hostile, then by definition the board is not going to support it. This is why the Huge offer is documented in a Huge circular which makes an offer to shareholders of Adapt IT.
On the Adapt IT website, you'll also find a response circular in which the board sets out why they believe that the Huge offer is unfair and unreasonable. The response circular was dated 17th May and therefore doesn't take into account the revised (and much higher) offer by Huge, which was made on 28th May.
That circular also points out the relatively lower empowerment credentials at Huge, which could affect Adapt IT's business. Of course, Volaris is even worse as a foreign company, but the combined circular notes that Volaris intends to put in place a transaction that would maintain the rating.
Huge may well do the same, but the Adapt IT board took a harder stance on Huge's lack of a formal plan in this regard. Instead, Huge claims that Adapt IT would still have a B-BBEE score of Level 1 even if the full buyout is successful, which Adapt IT is disputing.
So the fight continues...
Moving on to Huge, the first circular issued by the company was on the 16th of April, which formally made an offer to Adapt IT shareholders based on a share swap ratio and a premium to the 30-day VWAP of 33%. The revised offer, which is a premium by my calculations of around 120% to the 30-day VWAP referenced in the other documents, was made via SENS announcement on 28th May.
The latest source of fee revenue for advisors, attorneys and accountants is a circular issued by Huge Group to its shareholders setting out revised listing particulars and an enormous amount of information about what the group might look like.
If you are a shareholder in either company, it's worth a read. If you are just a bystander to this entire affair, then you may be interested to know that the proposed fees and taxes payable by Huge for this transaction come to just under R5m.
Amazingly, SARS would be the biggest winner, with R3.3m worth of securities transfer tax. The advisors and other costs make up the balance.
Based on a quick glance at Adapt IT's costs, Standard Bank is doing a good job of covering overheads with a fee of R5m. A further R2m to Webber Wentzel, along with a few other costs, helps the total fee reach R8.7m.
If you ever wondered how banks generate higher fee income when the markets are volatile or full of corporate transactions, wonder no more.
To help you navigate this transaction, visit the Adapt-IT
and Huge Group
websites to find all the circulars.