Note: I have been sitting on this post for some weeks pondering the situation. Following the supplementary bidders statement released by Oceania (13 January), I have decided to post it.
KBC is a stock I recently traded for a profit. I managed to sell for 16c literally right before the takeover by Oceania for 16c was announced. It is normally really dumb to sell for the initial takeover price as a higher bid could emerge. My timing was therefore awful.
Normally the correct strategy is to buy at or around the takeover price when a firm bid is announced on the basis of minimal downside and uncapped upside if a higher bid emerges. I prefer a takeover bid when the target company has an actual business or NTA supporting the price so if the bid falls over the downside shouldn't be monstrous. Compare this to failed takeover bids on mining exploration stocks where the downside is often obscene.
I have so far decided not to re-buy KBC. You may disagree. Either way, let's look at some of the salient issues.
1. Background
KBC is run by Nicholas Bolton (and also owns a big chunk of KBC stock) who found fame when he got involved in trying to sort out the Brisconnections debacle. KBC is a collection of crappy loans and bits and pieces that Nick Bolton is in the process of cleaning up and embarking on some acquisitions here and there. It is important to note KBC is in clean-up mode, not wind-up mode. I can't see a strategy for KBC. I will discuss some of the investments later in the NTA discussion.
KBC is a cigar-butt situation if ever there was one.
2. Takeover offer
The other major shareholder, Oceania Capital Partners (ASX: OCP), is unhappy with the speed of the process and wants to get control/more control and expedite the asset disposal process and get cash back to shareholders. Or perhaps it just wants to agitate Nick Bolton to hurry up. The desired outcome is pretty much the same either way.
Oceania has offered 16c cash for all of the shares it doesn't own. Defeating conditions are minimal. The bid is off-market however Oceania can also buy shares on-market at or below the offer price. KBC is trading bid/offer 17c/17.5c so assuming an 17.5c purchase price implies an 8.6% downside should no higher bid materialise. The downside is probably much higher should the bid fall over.
The offer is due to close 31 January however I would not be surprised to see the deadline extended. I also wouldn't be surprised if the offer falls lapses and falls over. It's not really clear if OCP really wants KBC and it's not clear whether many shareholders will accept the 16c offer and therefore whether a change of control will occur.
3. NTA
Reported NTA is 22.3c. This includes 11.7c cash. However, the actual value might be very different to reported NTA. The 'Independent Expert' values KBC at 25-28c per share. In addition, there are franking credits of $8.1m or 4.6c and carry forward tax losses of a whopping $201m. However, ignoring franking and tax losses, let's look at the composition of the NTA. The table below shows the current book value and low-high value provided by Pitcher Partners (Independent Expert):
Okay, there are plenty of little investments that aren't particularly material. Let's look at the elephants-in-the-room that account for 72% of book value ex cash:
PRFG. KBC now owns a $5.7m loan to PRFG v a book value of $1.2m. PRFG owns Australian Money Exchange which is in administration and buyers are being sought. Pitchers think this could be worth a lot more than book.
Totana. This started with a E9.6m loan the building of a solar plant in Spain. The Spanish solar industry appears to have regulatory issues, and to be frank I have no idea of how KBC or Pitchers value this loan.
Republic Private Equity. Not much detail on this position.
P&J Projects. This is potentially the real kicker to the NTA. This is a subordinated $5.95m mezzanine loan package over a residential/retail project in Zetland, Sydney. KBC has written the loan down to zero. Pitcher disagrees: they think it is worth something. The loan is currently in default. The salvage value of the loan will ultimately depend on the sale value of the property developments.
What I have been bemused about for some time and now find myself partially agreeing with OCP is why is KBC all of a sudden worth a lot more than reported NTA?
In particular the book value of the Zetland (P&J Projects) is zero, yet based on some pretty scant information the value has shot up to $3.5m to $6m. Defensive play by the target? Or if Pitcher Partners genuinely think there is more value, then I vote they step in manage a wind-up at KBC.
Regardless of my speculation it is probably fair to say:
a) the NTA is higher than the takeover offer
b) actual NTA is very rubbery
c) (assuming the takeover falls over) NTA may not really matter if new investments are purchased
which may materially impact future NTA either up or down
d) the share price has previously traded at a significant discount to NTA and there is no vision as to why the discount should close should the bid fall over
e) it is difficult to assess upside potential without knowing the major assets in detail
One positive is the bid has forced KBC to come out with more information about it's investments and with the stock in the spotlight it might be less likely to trade at a fat discount to NTA.
An example of a similar successful takeover trade was Thakral Holdings (THG). At the time, the share price traded above the offer price but well below the NTA (THG was a property business). In short it was worth paying above the bid price betting the bid would be increased. I'm not so convinced this is as straight-cut at KBC given the rubbery NTA and motives of the bidder and target.
So anyway, so while the upside is pretty good given that all of the NTA figures are above the current price not even mentioning franking credits, the situation is messy and potential plenty of downside if the offer falls over. I'm leaving it alone.
Kristian
Disclosure: no position in KBC
Please get in touch! I am always on the lookout for interesting stock ideas, with a particular emphasis on deep-value, growth companies run by outstanding management and arbitrage opportunities.
