Picture: 123RF/Sebnem Ragiboglu
Picture: 123RF/Sebnem Ragiboglu

A dogged scrap by a few dissenting shareholders has dragged niche technology business Cognition Holdings back into the public view.

Cognition, previously known as Foneworx, has morphed from its (diminishing) core in the fax-to-e-mail market to a data analytics specialist for large fast-moving consumer goods players. In a new thrust, its controlling shareholder, Caxton & CTP Publishers & Printers, will inject into Cognition (in exchange for more scrip) its 50.1% stake in the online real-estate platform Private Property.

The R127m deal is a potential game-changer, with Cognition holding a market capitalisation of just R176m.

Last week Cognition hosted a general meeting to vote on the proposed Private Property transaction. Bafflingly, no fewer than five Cognition directors were absent — including CEO Mark Smith and nonexecutive chair Ashvin Mancha (who were both ill).

There were calls from outraged dissident shareholders – William Kirsh (the founder of Primedia) as well as shareholder activists Chris Logan and Albie Cilliers – to adjourn the GM until the board could be properly constituted.

But acting chair Roger Pitt – who was interrogated about his independence as a board member of Merchantec, the sponsor and corporate adviser on the Private Property deal — ruled that the meeting could proceed.

The meeting was a prolonged and sometimes nasty affair. The dissenting shareholders argued that minority shareholder rights were being suppressed, and that directors were deliberately absent so as to avoid answering questions about Cognition’s new strategy.

There were frequent interruptions, and at one point Pitt warned Kirsh to refrain from interjecting.

Caxton and Cognition nonexecutive director Paul Jenkins questioned the dissident shareholders’ "independence" and referred to their antics as a "dog and pony show". "This is an ad hominem attack … it’s a parody of shareholder activism."

Logan responded that it was a dog and pony show with most Cognition directors absent.

In the two hours of toing and froing, enduring investors would at least have been able to pick up enough fundamental information to gauge prospects for a new-look Cognition.

From the outset it should be pointed out that Cognition sits with a real cash pile of around R70m, equivalent to around 50c a share. Its share price is now R1.26.

The company is perennially (albeit not spectacularly) profitable, and is able to support consistent dividends.

With the cash set aside, Cognition trades on a desultory earnings multiple of around five times.

Cognition, however, is completely overlooked by the market — presumably because diminishing profits in recent years have pointed to a business sans spark.

Caxton is determined to change that and has signalled that, aside from Private Property, other appropriate digital assets can be ushered towards Cognition to create a high-growth technology investment company. This should be an interesting exercise to monitor, since Caxton — though it owns a stake in fibre-to-home network Octotel – is not exactly known as a nursery for fledgling digital businesses.

To the impartial observer, Private Property looks a decent business. While it is markedly smaller than market leader Property24 — which is owned by technology giant Naspers — Private Property racked up profit after tax of almost R10m in the four months to end-June this year and R24m for the full year ended February.

If we work on a full-year after-tax number of R28m in the year to end-February 2019 then Cognition is valuing Private Property (R254m) on a forward multiple of just less than 10 or just over 10 on a trailing basis.

At the GM, Jenkins was at pains to stress Caxton was putting one of its best — "if not the best" — digital assets into Cognition, noting that Private Property was generating healthy cash flows and a healthy return on investment.

He said there were significant synergies in Cognition acquiring the business, and added that Naspers had at one point coveted Private Property, with a view to integrating the platform with Property24.

But a serious sticking point — at least for the dissenting shareholders — is the settlement terms, whereby Cognition will issue almost 106-million new shares to Caxton at 120c a share.

This will give Caxton a commanding 63% stake in Cognition, while minority shareholders have been asked to waive their rights to a mandatory buyout offer on the same terms.

Kirsh has argued that the value of Cognition — which carries an inferred valuation of nearly 150c a share in Caxton’s most recent annual report — has been understated for the purposes of the Private Property transaction.

In essence, he contends the Cognition share price is undervalued and Private Property’s is overvalued.

Cilliers said directors had a responsibility not to sell assets at below fair value. "You are letting go of our shares at a terribly low valuation."

The key question from Kirsh was whether the value of Private Property was overstated as no assumptions were made in relation to the competitive environment.

Kirsh asked repeatedly what the implications for Private Property would be if rival Property24 cut its subscription fees to zero.

He suggested that if this scenario played out, theoretically Private Property could be wiped out overnight.

Jenkins believed it was an unlikely scenario, pointing out that estate agents owned the balance of the shares in Private Property. "They will back the platform."

The FM understands that the dissenting shareholders are now heading to the Takeover Regulation Panel (TRP) in a bid to halt the deal.

Whenever there is a change of control of a listed company, minority shareholders are usually given an opportunity to sell their shares and exit their investment.

The rationale is that shareholders should not be forced to remain invested in a company that has undergone a fundamental change, especially if they do not support the change.

Cognition is now fully under Caxton’s control, and it’s certainly not difficult to argue that the strategy has changed as a result of the acquisition of the property portal asset. It remains to be seen if the TRP agrees that the dissenting minority shareholders should not be locked into an investment they did not choose.

Ultimately, would there really be an upheaval if the waiver is not upheld by the TRP?

The dissenting shareholders seem keen to take the money and run, while cash-flush Cognition can easily afford to fork out to ensure this disruptive influence is removed from the shareholder register.

Overall, Cognition remains an intriguing business at an interesting juncture.

Investors, however, may do well to wait for the dust to settle ... though there might be a temptation to snap up shares if the price tracks back down to 90c again.