Rumblings from Annual General Meetings

Financial Article 435 by Edward Rizzo - May 19, 2016

The Annual General Meeting season is now well underway. Last week alone, there were three AGM’s. I do my utmost to attend most of the meetings since I feel that it is very important for financial analysts and advisors to keep abreast of company developments. Invariably company executives deliver detailed presentations on their previous year’s financial performance and their immediate strategic objectives. The remarks from top executives generally provide important hints to shareholders.

I also think it is important for market participants to attend to get a feel of general sentiment among the numerous investors who turn up at these events. While some investors attend for the reasons well known to many, other investors truly turn up with the objective of understanding how their company is fairing. Moreover, this is an annual occasion for shareholders where they have an opportunity to question management on certain issues of interest.

One of last week’s AGMs was of GO plc. It is widely known that the telecoms group is on the verge of a takeover and earlier this month, GO confirmed that it received a number of binding offers for the entire issued share capital of the company. During the AGM, Chairman Mr Deepak Padmanabhan confirmed this and explained that these offers are currently being evaluated and a preferred bidder will be selected very soon. Since Emirates International Telecommunications (Malta) Ltd owns 60% of GO, it had been disclosed at the time of the Extraordinary General Meeting in October 2015, that any bidder would need to be prepared to acquire up to 100% of the company. This is due to the fact that according to the Listing Rules, any investor acquiring more than 50% plus one share must make a mandatory bid for the remaining shares.

Additionally, should a potential buyer exceed 90% of the issued share capital during a takeover process, they may elect to squeeze out the remaining shareholders and subsequently delist. This is what took place over the past 18 months in the acquisition of Crimsonwing plc and Island Hotels Group Holdings plc.

The possible delisting of GO plc should the eventual bidder acquire above 90% was foremost among many investors’ concerns when talking to a number of shareholders after the AGM of last week.

Since GO is significantly larger than both Crimsonwing and Island Hotels Group, the impact on the market would be much greater. It is worth highlighting that there are over 8,000 shareholders of GO owning the ‘free float’ of 40% compared to a few hundred investors in the two other companies delisted over recent months. Moreover, with a current market capitalization of €364 million, the value of shares held by these numerous investors amount to €145.6 million – far larger than the combined market cap of the two previously delisted companies let alone the €9 million and €12.1 million proceeds left in the hands of the free-float shareholders when Crimsonwing and Island Hotels Group were taken over.

Some investors remarked that the eventual acceptance of the GO voluntary bid would place them in a difficult situation since they would then need to seek alternative investment opportunities in an already limited local equity market and at a time when investor liquidity is also at very high levels.

Other investors at the AGM (mainly pensioners), who are dependent on generating regular income from their investment portfolio, also remarked that they would need to substitute their investment with other securities which similarly generate an income stream to supplement their living standards.

These two concerns clearly portray the imminent challenges facing the domestic financial market.

Following the delistings of Crimsonwing and Island Hotels Group  and possible upcoming delistings of GO and also 6pm Holdings plc, the equity market is unfortunately shrinking rather than getting larger. This is even more critical given the current environment with interest rates on traditional term deposits at close to zero at the larger more-established banks. This scenario normally encourages a greater number of investors to seek alternative investment options via the stock exchange. However, for this to happen, the market must be presenting these opportunities to the investing public.

I have aired these matters in some of my weekly columns over recent months. These concerns are now also being felt by many local investors. Although we are likely to experience an increase of bond issuance in the months ahead, we must not shy away from the fact that there has been a lack of equity issuance on the MSE. In this respect, it is noteworthy to highlight that the last offer of shares on the Malta Stock Exchange was that from Tigné Mall plc back in May 2013.

The launch of Prospects will unfortunately not fill this void in the market. Few of the pensioners would be willing to gain an exposure in their portfolio to micro enterprises (both local as well as international) that may be admitted to this new market.

This void can only be filled by attracting the more mature local companies having a profitable track record to list their shares on the Official List. In order for this initiative to gather momentum and achieve a degree of success, the MSE, market participants and advisors normally entrusted with assisting a company to list on the MSE (namely accountants, lawyers and stockbrokers) need to step up their efforts and embark on a campaign at explaining the listing process as well as the benefits that may be derived by a number of companies who may qualify but are not aware about these advantages.

Failure to do this could place the equity market in an unfortunate situation where it would remain too small to cater for the growing liquidity in the hands of investors. This increased availability of investible funds is not only due to the unprecedented low interest rate environment but may be exacerbated by the delisting of GO plc. Lack of new issuance could also lead to a dangerous overvaluation of certain equities as the sizeable liquidity chases some of the few remaining equities on the market.

Although present shareholders of these companies would be happy to see a further upturn in share prices, this would be a dangerous situation for the local market in general.

Euphoric sentiment caused by irrational demand is not healthy and many would remember the painful and long recovery process that ensued following the unsustainable peaks in 2000 and 2006.

With regard to bubbles and euphoric sentiment, at a recent AGM, a representative of a number of shareholders asked a company to consider a share split since he argued that this will help a company’s share price to continue rising. In my opinion, this is a rather irresponsible recommendation. However, I will tackle the concept of share splits in further detail in the coming weeks.

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