EDITORIAL: Volaris should aim to control Adapt IT without delisting it
It was a matter of time before Volaris, a Canadian-based tech investor, sweetened its offer for Adapt IT, a Durban-based group in the middle of a bidding war.
On Friday Volaris raised its R1bn cash offer for Adapt IT by about 8%, taking into account the fair-value range determined by an independent expert’s report that found that Adapt IT should fetch between R7 and R9.09 per share.
The new offer, framed as an opportunity for Adapt IT to cash in on a stock that hit a low of R1.10 less than a year ago, is below a competing all-share offer from Huge Group, which has been trying since December 2020 to combine with Adapt IT.
However, it’s hard to ignore that Volaris is coming in at the bottom of the range at which an independent expert figured the company should be worth. In addition, Adapt IT fetched more than twice that in 2016.
For Adapt IT to command such a hefty valuation in the middle of the “lost decade”, when businesses and the economy were in the throes of the state capture project, who knows where the price would be if one has faith that President Cyril Ramaphosa’s administration will make good on its promises to tackle corruption and remove stumbling blocks for potential Adapt IT clients to embark on capital spending.
It’s true that a lot still needs to be done to create an environment where executives can easily convince their boards and shareholders that it is time to put money into the economy, which is not expected to recoup all pandemic-induced losses, when it slumped the most in a 100 years in 2020.
It would be unfair to say Ramaphosa, who inherited a state whose sole purpose was to line the pockets of politicians and those close to them, has not taken steps to reinvigorate the economy, even though there is little to show for his efforts.
It seems international companies such as Volaris, and even Heineken, which has approached liquor manufacturer Distell about a tie-up, are betting on a turnaround in fortunes for the local economy.
If the gamble pays off, Adapt IT shareholders, 40% of which had already irrevocably undertaken to support an earlier bid of R6.50 per share, will not participate in the potential upside in the share price.
At the least, Volaris, with deep pockets and a determination to create an African IT champion from its R300bn-plus Toronto-listed parent Constellation Software, should match the true value of Huge’s all-paper offer.
Huge has gone straight to shareholders with an offer at the top end of the independent expert opinion of how much Adapt IT is worth, putting in a R9.09 bid per share that, on the face of it, trumps the proposal from Volaris.
Under the Huge offer, Adapt IT investors will get 1.37 Huge shares for each Adapt IT, a higher swap ratio from 0.9 for one, effectively giving Adapt IT shareholders majority holding in the combined entity.
That swap ratio is based on a price of R6.65 per Huge share. But there’s a problem: Huge’s share price is nowhere near that level, trading at R5.98 on Friday and chipping away at the commercial merits of its offer.
At current prices, Huge’s offer is worth about R8.19 per Adapt IT share, valuing the target at slightly higher than Volaris’s offer of R7, but putting it in the middle of what an independent expert deems to be a fair-valuation range.
Moreover, Huge’s offer is pitched as a rare chance to create a sizeable IT company to better compete with the likes of EOH and Telkom’s BCX, while the rationale for an all-paper bid is framed as an opportunity for investors to share in the potential upside of the share price of the combined entity.
To counter that, Volaris should structure its offer, which is at about a 12% discount to Adapt IT’s share price a week ago, differently, to kill two birds with one stone.
It could still give investors an easy payout at the current offer but should be buying a controlling stake and keeping a portion of Adapt IT listed for investors to remain exposed to the potential upside estimated by the independent expert.
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