The bid battle for Local Shopping REIT (LSR:28p), a small-cap property investment company that’s sold off almost all its properties, has ratcheted up in the past fortnight after the company made its formal response to bidder, Thalassa (THAL:80p).
Local Shopping REIT is urging shareholders to reject the cash and shares offer – the first close date is 27 March 2019 and the earliest Thalssa could close its offer is 10 April 2019 – and instead authorise the directors to take the appropriate action to liquidate the company and make a full cash return as per a proposal that will be voted on at a general meeting on 5 April 2019.
Thalassa is offering 14.64p a share in cash and 0.26 of its own shares per each Local Shopping REIT share. A share buyback programme has helped drive up Thalassa’s share price from 68.25p at the end of January to 81p now, implying the cash and shares offer is worth 35.44p per Local Shopping REIT share. That’s well in excess of Local Shopping REIT's share price of 28p.
Quantifying returns from winding the company up
Local Shopping REIT points out that it now has £22.8m in cash, a sum worth 27.6p a share, and is awaiting the completion of two properties that will bring in a further £400,000, to raise its cash pile to 28p a share. Effectively, the cash backs up all Local Shopping REIT’s share price. In addition, the company has 12 properties remaining to sell that have a carrying value of £4m, on which it has agreed terms of sale on six of them. Of the remaining six properties, three will be held back from disposal so to maintain the company’s REIT status until it enters into a liquidation process.
Thalassa is strongly opposed to liquidating the company, hence why it used its 21m shareholding in Local Shopping REIT, representing 25.5 per cent of the issued share capital, to object to the voluntary liquidation at the end of last year (‘Thalassa stalls Local Shopping REITs cash return’, 18 Dec 2018).
Bearing this in mind, Local Shopping REIT has since sought legal opinion from leading Queens Council on the options available to it in order to return capital to shareholders. The advice has 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.
Although the costs associated with winding up the company are already factored into the Local Shopping REIT’s last reported net asset value of £27.7m, or 33.5p a share, which was prepared on a liquidation basis, Local Shopping REIT has incurred costs since it released its annual results in December 2018 when it said that net realisable value for shareholders would be at the lower end of its previous 33p to 34.5p indicative range.
Indeed, the cost of the takeover defence in relation to Thalassa’s offer is estimated at £435,000 to £520,000, or roughly 0.5p a share. Nonetheless, with 28p a share in the bank then even if the £4m-worth of properties up for sale only raise 85p in the pound net of all discounts and fees, then Local Shopping REIT would still have 32p a share of cash and no debt.
I will not comment on the mudslinging between the two parties, but what is blatantly clear to me, as it was when I recommended rejecting Thalassa’s cash and shares offer (‘An offer easy to refuse’, 11 Feb 2019), is that the clarity of having a cash return more than double that offered by Thalassa by liquidating the company is preferable to taking shares in Thalassa in lieu of the cash even though its cash and share offer is worth potentially 10 per cent more.
I say ‘potentially’ because Thalassa would be returning only £9m of Local Shopping REIT’s current cash pile of £22.8m to its shareholders, and issuing 16m new shares to increase its own issued share capital excluding Treasury shares by 91 per cent. The issue being that it would be impossible for all of Local Shopping REIT’s shareholders to sell their Thalassa shareholdings at the current 80p offer price as they would hold 47.66 per cent of Thalassa’s enlarged share capital. Not only is the 14.64p a share cash element of Thalassa’s offer well below the 26.7p a share initial cash distribution that Local Shopping REIT had planned to make last month [before Thalassa voted against the wind-up of the company], but there are multiple reasons why some investors, myself included, would not wish to hold shares in Thalassa. It’s investment performance being the principal one, and that’s before you consider corporate governance.
Investors backing Thalassa nursing hefty losses
To recap, Thalassa raised £5.4m in a placing of 4.5m shares at 120p in April 2013, and another placing of 7.24m shares which raised £18.2m, at 250p, in November 2013 to boost the issued share capital to 25m shares. Shareholders who backed both placings are well under water. Moreover, short of ideas of how to deploy the capital, which is why the company strayed outside its oil services sector by taking a punt on the shares of Local Shopping REIT, Thalassa's board has been using its cash to buy back shares ever since.
Even investors who backed Thalassa’s £3.1m placing at 50.1p a share when it joined the Alternative Investment Market (Aim) in July 2008 have only made a 60 per cent return in the past decade. That represents a compound annual growth rate of 4.5 per cent, hardly a share price performance that’s likely to get an investor’s pulse racing. You would have been better off putting the money into UK government 10-year gilts, an investment with far less risk.
Also, Thalassa’s shares are illiquid, another reason why they trade on a hefty discount to net asset value, but not the only one as the company has reported a combined post-tax loss of $8.75m in the past two financial years, a trading performance that suggests more than a degree of caution is warranted.
Reject the offer
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 Mar 2018), I still feel that you will end up with a small profit by rejecting Thalassa’s offer and voting in favour of the resolution Local Shopping REIT proposes at its forthcoming general meeting on 5 April 2019 to seek to liquidate the company and make a full cash return to shareholders.
