Thalassa (THAL:80p) has failed in its attempt to takeover Local Shopping REIT (LSR:29.8p), a small-cap property investment company that’s sold off almost all its properties, and the offer has now lapsed. At the final closing date shareholders holding 11.36m of the 82.5m shares in issue had accepted Thalassa’s cash and shares offer. That was 245,000 fewer acceptances that at the first closing date of 27 March 2019 and meant that after taking into account the 21m shares held by Thalassa the bidder controlled less than 40 per cent of the shares in issue.
It’s the right outcome. Indeed, I have strongly expressed the view that the bid was an opportunistic attempt by Thalassa’s directors to get hold of Local Shopping Reit’s cash pile in exchange for their low quality equity (‘Local Shopping REIT urges investors to reject Thalassa’s offer and vote to wind up company’, 26 March 2019).
Moreover, following last month’s shareholder vote at a general meeting of Local Shopping REIT, the directors of the company are now “authorised to take such actions as they may consider necessary to liquidate the company and achieve the mandated outcome of the investment policy as approved at the general meeting on 25 July 2013, including if necessary to present a petition to wind up the company and return its cash to shareholders.”
Thalassa had used its 25.5 per cent stake in Local Shopping REIT to thwart a previous attempt to return the company’s cash to shareholders, prompting the directors to seek legal opinion from leading Queens Council on the options available to it in order to return capital to shareholders. The advice led the directors to believe that “prospects of a court making a winding up order are good”, so that the company can then return its cash to shareholders, hence the shareholder vote last month.
Bearing this in mind, Local Shopping REIT had cash reserves of £23m at 8 April 2019 and was awaiting completion of two properties for gross proceeds of £500,000 to boost its cash pile to £23.5m, or 28.5p a share. This left it with only eight properties to sell which have a carrying value of £3.43m, or 4.2p a share. Terms with purchasers have been agreed on three of these properties. The plan is to seek buyers of two of the other five properties and hold back three properties in order to maintain the company's REIT tax status until it enters into the liquidation process, so to avoid triggering corporation tax liability which under the REIT rules could apply from the end of the previous financial year end (30 September 2018). The contracted annual rental income of £400,000 from these three properties will help defray the company’s operational costs, including those associated with maintaining its listed status, until its liquidation.
The bottom line is that having first advised buying Local Shopping REIT's shares, at 30.8p, to play the end game of the liquidation process (Alpha company research, 5 March 2018), I still feel that you will end up with a small profit. Admittedly, it will be less than I had first anticipated and costs of seeing off Thalassa’s bid eroded the cash pile, but I still expect a positive outcome nonetheless. Hold.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.