PAUL MCBETH: Two cheap takeovers

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He’s owned shares of Bremworth since January 2024.

If you’re looking for a lesson in the twin parables of 2 Cheap Cars’ biggest shareholder lifting his offer to buy out minority shareholders and David Ferrier’s partial takeover of Bremworth, it’s probably ‘be aware of the company you keep’.

We’re often told of the dangers of a controlling or influential shareholder ruling the roost of NZX-listed companies that may or may not be walking in lockstep with their smaller co-owners.

That’s an extra risk for the thousands of minority shareholders who show more interest in the smaller end of the stock exchange than institutional investors, who tend to decide that it’s not worth bothering with small caps. That means those retail investors need to venture into that space with their eyes wide open.

The thing with smaller listed companies is that it’s easier for a group of shareholders to rally the 50% of voting rights needed to force the issue than it is for, say, a Fisher & Paykel Healthcare that has a handful of major investment houses owning roughly a third of the business to plead their case to more than 21,000 shareholders.

Scale comes with its own issues, after all.

Back to our two listed minnows.

I’ll be by your side forever more

Used-car operator 2 Cheap Cars’ chief David Sena buckled to the rearguard action mounted by a group of minorities who were affronted by his 80 cents per share offer to buy the 24% that he didn’t already own, lifting his offer after putting the hard sell on the 220 or so investors.

It’s not terribly surprising that a used car salesman came in low in his initial wrestling with his fellow directors, and shareholders appeared more miffed by independent adviser Simmons Corporate Finance’s valuation range of 71-to-90 cents, which they felt undersold the business.

But that’s the beauty of the public market arena. Owners can stake out their claim as the 2 Cheap Cars shareholders did on the ShareTrader forum, debating the merits and pitfalls, and ultimately make up their own minds based on their personal circumstances.

There was no small irony in the last-minute plea from Just Life chief Tony Falkenstein for his fellow 2 Cheap Cars shareholders to accept Sena’s offer being trumped a day later with a 10 cents per share uplift that seems to have won over enough investors for the used-car business to join the list of former NZX-listed companies.

Some shareholders certainly see the 90 cents offer as too light, but markets aren’t typically run by consensus.

Keep smiling and keep shining

Bremworth is a different kettle of fish, with a big enough cohort of shareholders – including the founding families’ interests – wanting to keep going it alone rather than take the bigger pile of cash offered by rival Godfrey Hirst’s parent, Mohawk Industries.

They’d already vented their anger last year when forcing a boardroom shakeup, but as the Mohawk deal lingered in the bowels of the Commerce Commission’s approval process, Ferrier decided he’d had enough of waiting and started building a stake in the carpetmaker that ultimately led to his bid for control.

And in what’s largely been a fait accompli, he secured lock-up arrangements with enough fellow shareholders – who waived their right to contemplate a better offer should it emerge – to land in his target 50%-to-55% control range before the starting gun was fired.

That undoubtedly would’ve been challenged in court if Mohawk’s flirtation with trumping Ferrier by 5 cents a share had gone further than a press release or two. But the wool industry veteran had largely boxed in the Bremworth board, most of whom will walk out the door once the carpetmaker’s annual report lands later this month.

The dwindling pool of options left the departing independent directors to recommend Bremworth shareholders accept Ferrier’s partial offer of 90 cents per share given it landed within the valuation range of 87 cents-to-$1.07 by independent adviser Clarien Partners, if not quite reaching the 96 cents envisaged by an orderly sale of the carpetmaker’s assets.

Close your eyes and know

That leaves those shareholders outside Ferrier’s inner circle with a few options.

They can stick with the wool industry veteran to see what he has up his sleeve, taking the 90 cents a share for at least 44% of their holding – depending on the level of uptake – or hanging on to the lot and betting that Ferrier’s ability to execute matches his success in taking control of the carpetmaker.

Failing that, they can take the money from the partial takeover and sell the balance on market, or if they don’t have the stomach to see where that price ultimately settles, they can log into their favourite trading platform and get out before the offer closes.

At Friday’s closing price of 70 cents, that implies a 54-cent value on the 561 shares that Ferrier won’t have to buy from someone with 1,000 shares, if the partial takeover offer secures 100% uptake.

Ferrier’s intervention can be read two ways. One is to see it as a bitter pill for a company that had found a way to crystallise the latent value and take advantage of a pot of cash. The other is to see it as an industry stalwart backed by long-time shareholders who want to preserve domestic capability and can envisage a future that puts Bremworth at the heart of a resurgent wool sector.

For good times and for bad times

But both David Sena and David Ferrier obviously see value in their respective targets – they wouldn’t pursue them otherwise.

That comes with the territory of investing in the smaller end of the stock exchange, where an opportunistic buyer can swoop in when something looks a little on the cheap side.

Investors know that a takeover can come a little more easily for a tiddler than for a major player and factor that into their possible return profile, alongside any other goals they want to achieve from their holding.

That also means shareholders probably need to be more engaged with those smaller direct investments, keeping abreast of how their fellow owners are thinking about their shared interests – something that’s easiest to do when there’s a physical annual meeting to gossip over cups of tea about how the past year’s gone and where the future one’s going.

As the 2 Cheap Cars experience shows, those discussions can extract a little bit more out of a hungry controlling shareholder, just as the Bremworth example illustrates how an investor can be sidelined if they’re not part of an inner circle.

Image from Simply thrilled on Unsplash.