Every now and then, companies announce corporate actions that offer investors the potential to generate returns that are largely uncorrelated to markets.
Not just do these opportunities offer nicely uncorrelated returns, but they can be quite lucrative, particularly when markets are flat or down (the JSE All Share generated a miserable -3% in January).
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First up, Transaction Capital (TCP) announced the proposed unbundling of WeBuyCars (WBC) and its separate listing on the JSE.
Following Transaction Capital’s problems, top management changes and talk of “unlocking value” from the group, Transaction Capital now proposes that it change WBC’s name to “We Buy Cars Holdings”, separately list the group on the JSE, and then do a dividend in specie of the shares to its shareholders (an unbundling).
Looking at my earlier article on Transaction Capital’s sum-of-the-parts (SOTP), you will notice that I estimate WBC’s equity value on a price-earnings ratio of around 10 times at around R5 billion or around 637 cents per share (cps). This is quite conservative, and I have heard convincing valuation arguments that tend to cluster around a fair value of R6 billion to R8 billion, or around 800cps to 1 000cps.
The remaining profitable business, Nutun, earns about the same quantum of profits as WBC. Thus, the fact that Transaction Capital shares trade at around 800cps shows how much value remains ‘locked up’ in the group. This action may unlock this through creating two separate listed companies each worth around R5 billion to R8 billion in market cap (assume the head office is collapsed to zero and SA Taxi is worth nothing).
Why has the share price not responded more to this news?
Well, there are complexities from debt/debtholders to minority shareholders along with HoldCo shareholder approvals that may hamper this playing out. Or perhaps, beyond anything else, the market is just waiting to see what WBC is really worth.
I personally think it is more the latter, and therein may lie the opportunity for investors in this corporate action.
Canal+ and MultiChoice
The next corporate action that offers upside is Canal+ making a (high-level, non-binding) offer to buy MultiChoice Group (MCG) at an anticipated 10 500cps price in cash.
In response, MultiChoice’s share price jumped over 20% from around 7 500cps to the mid-to-low 9 000cps.
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Surely, this leaves a takeover arbitrage of 12-15% on the table for investors to buy and flip MultiChoice shares for Canal+ cash? Surely that is attractive? Well, yes and no …
Firstly, let us take the same capital we could place into this trade and put it into South African 10-year government bonds (the so-called ‘risk-free’ investment around here). These bonds currently offer a 9.75% yield. Let’s assume no change in price, thus the yield is the (annual) return and, therefore, this offers us the risk-free opportunity cost of the MultiChoice arbitrage.
Because MultiChoice’s delisting is not guaranteed (the offer is non-binding and the price is only anticipated, let alone the whole host of approvals this takeover would require from a bunch of committees), then how much more are we being paid to take this ‘risk’?
Well, if we take the 9.75% risk-free rate out of the arbitrage gap, this leaves about 3-4% on the table to compensate investors for this corporate action risk (the risk that the takeover does not proceed and/or the risk that the takeover takes a long time, and thus loses out on the time value of money).
For such a complex and regulatorily burdensome takeover (which at best will take ages to conclude, and at worst is dead in the water), a 3-4% takeover premium feels too thin for me to be excited about.
Thus, completely opposite to the Transaction Capital value unlock story, the MultiChoice delisting arbitrage does not excite me.
* Some portfolios controlled by Keith McLachlan may hold shares in Transaction Capital.
Keith McLachlan is chief investment officer at Integral Asset Management.