Buildmax bid offer deemed unfair
Buyout price appears to discount firm’s recent strong turnaround
BDO Corporate Finance, the independent experts contracted to assess the buyout offer for mining services firm Buildmax, determined a higher valuation for the company, deeming the bid unfair but reasonable.
BDO determined a valuation range of 24c per share to 33c per share for Buildmax and in the scheme circular it sent out this week, it said a "most likely" valuation for Buildmax was 28c per share. The buyout offer is pitched at 15c.
But BDO did point out that Buildmax held net debt of R200m as at the end of February — reflecting a debt to equity ratio of four times.
This gearing, according to BDO, introduces financial risk and may limit the ability of the business to borrow further.
The "low-ball" offer of about R27m for Buildmax, which close to four years ago was holding a market capitalisation of around R560m, was pitched last week by a new special purpose vehicle consisting of members of Buildmax’s management team and black economic empowerment participants.
Central figures are Buildmax CEO Justin Colling and former director of public prosecutions and Buildmax nonexecutive director Bulelani Ngcuka, who is part of Vuwa Investments.
Vuwa owns 12.2-million shares in Buildmax, equivalent to 6.75% of the issued shares, while Colling holds 18.2-million Buildmax shares, roughly 10% of the company’s issued shares.
The buyout offer, however, is pitched at 15c per share – the lowest level the share has traded over a 12-month period. It is less than half the share price for the early part of November, when it bobbed around 33c.
On Tuesday, Buildmax’s shares closed at 17c on the JSE, which might be interpreted as some investors betting that a higher buyout price is in the offing. The 15c per share buyout offer seems to discount Buildmax’s interim performance to end-August when a strong turnaround was registered with headline earnings of around 7c per share or R13.9m. The offer also discounts the last stated tangible net asset value of 110c per share by 86%.
Despite the improvement in interim earnings, the directors remained downbeat and pointed out that historically, the second half of the financial year had always been challenging due to the December holidays and the rainy season. They said the traditional challenges were "exacerbated by the uncertainty of clients extending or renewing our existing contracts on the back of uncertain extensions with them agreeing new contracts with Eskom".
Other listed mining services companies — such as Sentula Mining (Now Unicorn Capital Partners) and Extract — have also undertaken radical restructuring to salvage a vestige of viability for shareholders.
Niall Brown, a portfolio manager at Flagship Asset Management, intends to vote against the buyout offer, arguing that the 15c per share pitch woefully undervalued Buildmax.
He said the offer was opportunistic as it hugely discounted Buildmax’s net asset value. The offer also followed the release of strong interim earnings which showed improved contract pricing and cash flows.
In addition, Brown pointed out, there was reduced competition due to the demise of major competitors in the mining services sector.
Colling and Vuwa, however, believe it is unsustainable for Buildmax to maintain its listing on the JSE as the costs of the listing are a significant drag on financial performance and are unduly restrictive to the ordinary course of operations.
The Buildmax buyout effort has support from two large shareholders in the form of investment giant Brait (a 40% shareholding) and large asset manager Coronation Fund Managers (16.6%).
The vehicle in which Brait holds its shareholding in Buildmax has reached the end of its fund life and will be forced to dispose of its shares in the near future. This forced exit could create weakness in Buildmax’s share price. Brait’s exit would also mean the company no longer had a shareholder of reference, which could have implications for future funding endeavours in terms of access to borrowings.
Buildmax has also convened an independent board, comprising independent nonexecutive directors Colin Wood, Colin Brayshaw and David Lamola, that is supportive of the buyout proposals.