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OPINION

On the takeover trail

On the takeover trail
March 14, 2016
On the takeover trail

Since then, Aim-traded KBC Advanced Technologies (KBC:210p), a consultancy and leading software provider to the global hydrocarbon processing industry, has seen a 185p-a-share recommended cash offer from Nasdaq-quoted Aspen Technology trumped by a knockout 210p-a-share cash bid from Yokogawa Electric. Admittedly, I was too hasty in advising that you sell in the market in mid-January at 184p after the Aspen offer had been made. Not that you will have done badly, as the cash offer still represented a hefty 168 per cent premium to my buy-in price of 69p when I initiated coverage ('Fuelled for growth', 5 May 2013), and a hefty 43 per cent premium to the price when I last advised buying the shares ('Running oily gains', 11 Nov 2015). If you held on, you will have trebled your money. Either way, Aspen has now walked away and given that Yokogawa has received 42 per cent acceptances from KBC shareholders, its higher offer looks set to win the day.

It also means that the average gain on the 10 closed takeovers I mentioned in my January article is more than 50 per cent per holding. That includes a quick-fire gain on shares in Renewable Energy Generation (WIND), an Aim-traded renewable energy company I highlighted in the autumn ('The takeover game', 11 Nov 2015). The disposal of the company's assets has now completed, the shares have delisted and shareholders should now be in receipt of 60p-a-share of cash, representing a 22 per cent return on my 49p buy-in price in under two months.

 

Far Eastern delights for Plethora shareholders

The other company I highlighted in that November article was Aim-traded Plethora Solutions (PLE), a UK-based speciality pharmaceutical company dedicated to the development and marketing of products for the treatment and management of urological disorders. Plethora's principal product is PSD502™, a prescription treatment for male premature ejaculation that obtained marketing authorisation from the European Commission in November 2013.

I noted at the time that Plethora had received a bid approach from Hong Kong-listed Regent Pacific (Hong Kong Stock Code: 575). Regent Pacific and its concert parties held 29.88 per cent of Plethora's issued share capital and their indicative offer was pitched at 15.7076 new Regent Pacific shares for each Plethora share. Regent Pacific's share price was HK$0.10, so using a sterling to Hong Kong dollar exchange rate of £1:HK$11.71, the potential offer valued each Plethora share at 13.4p, and the company's fully diluted share capital (excluding the out-of-money outstanding options and warrants) at £131m. However, ahead of a formal bid being announced, it was still possible to buy Plethora's shares in the London market for only 5p.

The massive difference between the implied offer price of 13.4p a share and Plethora's market price of 5p reflected the fact that there was no cash element and Regent Pacific only had a market value of £30m, so it was going to issue a huge slug of equity to complete the deal. However, I was unfazed by this and thought that there was potential to exploit a trading opportunity by buying Plethora shares in the London market, waiting for the scheme of arrangement to complete, and then selling the newly issued Regent Pacific shares in Hong Kong. Moreover, I also felt that the interest of local investors would be aroused by the potential acquisition to prevent Regent's share price deflating too much, certainly not by 60 per cent as the valuation difference between the London and Hong Kong share prices implied. In fact, I was so certain that I reiterated my buy advice on Plethora shares at 4.5p earlier this year ('Stock check', 5 Jan 2016).

In the event, the formal bid was made, and the scheme of arrangement completed last week. Plethora shares have been delisted from Aim, and the new Regent Pacific consideration shares started trading in Hong Kong on Thursday, 10 March. You can sell them in the market for HK$0.079, albeit that is 21 per cent lower than shares were trading at when the bid approach was made to Plethora in November. But sterling has weakened by 5 per cent against the Hong Kong dollar to £1:HK$11.14 in the interim period, so currency gains offset some of the decline in Regent Pacific's share price. In any case, the 15.7076 new Regent Pacific shares you will have received for each Plethora share are worth HK$1.24 in total, or 11.1p at current exchange rates. This means that by selling in the Hong Kong market you will have made a 122 per cent return on your money in only four months, and that's what I recommend you should do.

As shares in a company listed and traded on the Hong Kong Stock Exchange, all new Regent Pacific Shares are required to be held in certificated form. Former Plethora shareholders who are awaiting their New Regent Pacific share certificates should note that the new share certificates are expected to be dispatched on or before Wednesday, 23 March 2016. If you have not received your share certificate by this date please contact Equiniti on 0333 207 6372, or Tricor Tengis in Hong Kong (Regent Pacific's Registrar) via email at is-regentenquiry@hk.tricorglobal.com or +852 2980 1333, for information relating to your new share certificates.

To trade your new Regent Pacific shares on the Hong Kong Stock Exchange (in a similar way to the trading of uncertificated shares on Aim), such shares (which will remain in certificated form) will also need to be deposited into CCASS, the clearing and securities settlement system used within the Hong Kong Stock Exchange. By far the easiest way to do this is through a UK bank or securities broking firm with Hong Kong counterparts. Barclays Stockbrokers (0800 279 6551 or 0044 141 352 3909 from outside the United Kingdom) and TD Direct Investing (0345 607 6001) both provide this service. It may seem a laborious process, but on the basis that the investment in Plethora has more than doubled your money I feel it's more than worth it.

 

Fortune favours the brave

My interest in the Hong Kong stock market extends beyond the Plethora bid situation. That's because a consortium that controlled almost the majority of the issued share capital of Hong Kong-based energy group Fortune Oil (FTO) completed the takeover of the London-listed company 12 months ago in a deal that valued the equity at £259m, or 10p a share. Shareholders were also given a contingent value right worth 5p a share, and one that meant they would benefit from a material share in any value realised from Fortune's valuable 11.3 per cent shareholding in Hong Kong-listed China Gas Holdings (HK:384), an energy giant that had a market capitalisation of £5bn at the time. The initial 10p-a-share cash offer for Fortune Oil was ahead of the 9p price level at which I advised buying at in my 2014 Bargain Shares portfolio.

I recommended accepting the cash offer as I felt that there was a fair chance that shareholders would also receive the other 5p a share as the stake in China Gas Holdings was worth £565m at the time, or 21.8p per Fortune share. The 15p-a-share offer also represented a small premium to Fortune Oil's last reported net asset value of 13.8p, but this only valued the China Gas stake at £400m in the accounts, or 6.3p per Fortune Oil share less than its open-market value. Since the deal completed on 9 March 2015 shares in China Gas Holdings have fallen by around 17.5 per cent, and the bidders have just released a statement to the London Stock Exchange stating that the trigger conditions for the contingent value rights have not been met, so the 5p-a-share payment will not be made.

It's not a great result considering that the shareholding in China Gas Holdings is still worth way in excess of the effective price the consortium paid for Fortune Oil. It also highlights a number of issues worth considering when investing in foreign companies listed on the London market.

 

Issues worth considering

Firstly, the combination of low liquidity, low trading volumes and lower levels of institutional interest means there is a greater chance of share prices failing to adequately reflect the true value of a company's equity. Predators are clearly aware of this, which is why 11 companies on my watchlist have delisted following corporate activity in the past 14 months.

True, you will have reaped handsome rewards in all bar one of these special situations if you had followed my buy advice, but it's not always the case as the exit of Fortune Oil highlights. Indeed, the consortium that acquired the company has effectively used its majority shareholdings in Fortune Oil to get hold of its assets on the cheap. There was little minority shareholders could have done to stop this happening given they had majority control to start with. Furthermore, share prices of small-cap companies can stay depressed for long periods of time before corporate activity emerges to spark investor interest. That's something worth considering when you spot an apparent valuation anomaly.

Secondly, one direct consequence of the lack of liquidity and interest from institutional investors in small-cap companies is that raising capital is more difficult than it should be; and due to the chronic undervaluation of some of these foreign Aim-traded companies, directors are also being deterred from considering corporate activity as it invariably would constitute a reverse takeover under Aim rules. This is an important factor for small-cap companies as entering reverse takeover transactions entails significant additional cost, time and uncertainty to execute, so holding back the development of the companies concerned.

Thirdly, the administrative costs and management time spent on maintaining an Aim listing can be disproportionate when weighed up against the benefits, especially if a company's paper is significantly undervalued. In many cases, this time could be far better spent by senior management on developing the business they are charged with running. This was the reason given by the board of small-cap investment company Eurovestech for delisting its shares from Aim, a company I included in my 2012 Bargain Shares portfolio before exiting the holding at a small net loss last month ('Investment company watch', 16 Feb 2016).

It's not just small-cap companies that are being affected. The proposed delisting of shares in Canadian wealth manager and financial services group Canaccord Genuity (CF:230p) at the end of this month is a case in point. The board recently announced that "given the limited trading in London-listed shares, costs and administrative burden of maintaining the listing on the Official List... are disproportionate to the benefits thereof". The same reason has been cited by Signet Jewelers (SIG), a large-cap company that has a dual listing on the New York Stock Exchange and plans to delist its shares from the London market shortly. I have run my rule over both to see whether there is an arbitrage opportunity to exploit by buying the London shares, registering them on the foreign exchange as soon as they stop trading in London, and then selling the holdings on the overseas exchanges. In both cases, market pricing is efficient, but it's always worth investigating as the case of Plethora Solutions clearly highlights. I will remain vigilantly on the lookout for more of these valuation discrepancies for you to exploit.

 

MORE FROM SIMON THOMPSON...

I have written articles on more than 80 companies this year:

Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)

Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)

Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)

Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)

GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)

LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)

Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)

32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)

Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)

Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)

KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)

Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)

Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)

Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)

easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)

Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)

Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)

Equity market strategy ('Bear Market signals', 25 Jan 2015)

STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)

Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)

Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)

Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)

Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)

Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)

AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)

IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)

32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)

BP Marsh & Partners: Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)

Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)

Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)

PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)

Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)

LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)

GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)

Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)

600 Group: Sell at 10p ('600 Group warns', 17 February 2016)

Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)

Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)

CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)

WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)

Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)

Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)

Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)

Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)

Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)

Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)

Cambria Automobiles: Buy at 83p, target 95p; Vertu Motors: Buy at 71.75p, target 85p to 90p ('Lowly rated car dealers motoring back', 7 March 2016)

Sanderson: Buy at 80p, target 90p ('Tapping into cloud based profits', 8 March 2016)

H&T: Buy at 195p ('A golden opportunity', 8 March 2016)

Software Radio Technology: Buy at 25p, target 40p ('Software Radio surges on huge contract win', 9 March 2016)

STM: Buy at 55p, target 80p ('Lowly rated, cash rich pensions play', 10 March 2016)

Plethora Solutions: Take profits at HK$0.075 ('On the takeover trail', 14 March 2016)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking