Unlocking Shareholder Value through Corporate Actions

Article #617 by Edward Rizzo - Published Weekly

In September 2017, I had published an article on the rationale for spin-offs by explaining that a spin-off is a corporate action whereby a parent company hives off a subsidiary into a separate business via the payment of a ‘dividend in-kind’ to all common shareholders of the parent company who receive an equivalent shareholding in the subsidiary. The company that is spun-off generally obtains a stock exchange listing allowing shareholders to have tradeable shares in both companies.

While spin-offs are generally conducted for the parent company and its subsidiary to have independent management and different business strategies for their diverse business units, the main aim is to unlock shareholder value. The general belief is that the market usually values a diversified group of companies at less than the sum of its individual business units. This is commonly referred to as the ‘conglomerate discount’ and it reflects the challenges and inefficiencies that arise in managing a diversified group of companies as opposed to specialising and focusing on one business strategy.

Over the years, only two spin-offs were conducted by companies listed on the Regulated Main Market of the Malta Stock Exchange. In October 2015, all shareholders of GO plc received a ‘dividend in-kind’ equivalent to €0.3313 per share via the allotment of shares in the property subsidiary Malta Properties Company plc. Similarly, in January 2018, Simonds Farsons Cisk plc carried out a spin-off of its property holding company Trident Estates plc via a ‘dividend in-kind’ equivalent to €1.24 per share.

The distributions by both GO plc in 2015 and Simonds Farsons Cisk plc in 2018 were equivalent to the net asset value per share of both subsidiaries being spun-off. It is worth noting that the net asset value of Malta Properties Company plc increased to €0.5071 as at June 2019 from €0.3313 almost 4 years’ earlier, representing an increase of 53.2% or a compound annual growth of around 11%. This strong growth came about following the disposal of a number of properties at prices higher than the value in the balance sheet at the time of the spin-off as well as the redevelopment of other properties within the portfolio including ‘The Bastions’ offices located in Floriana which were leased out immediately following completion in H2 2018.

While the NAV of Trident has not grown over the past 18 months as it stood at €1.255 on 31 July 2019 (compared to €1.2351 on 31 January 2018), it is however estimated to jump to €1.74 in 2021 following information contained in the Prospectus published recently in connection with the €15 million rights issue. Despite the additional shares created as part of the rights issue, the valuation of Trident Park which is currently under development is expected to rise to €68 million (compared to a current value of €19.2 million) upon completion in 2021 assuming all rentable areas are rented out. The estimated NAV for 2021 does not take into consideration any valuation uplift to the other major asset of the company, namely Trident House in Qormi with a footprint of 13,200 sqm and currently valued at only €10.7 million.

Apart from spin-offs of subsidiaries, at the start of 2019 there was another important corporate action in the local equity market with the ultimate aim of creating shareholder value. This was when GO plc offered for sale 49% of its entire stake in BMIT Technologies plc. GO plc had always maintained that one of its aims for the partial sale of BMIT Technologies plc was to deliver returns to its shareholders in a tax-efficient manner via dividends and to generate funds to accelerate its planned investment in fibre infrastructure across the Maltese Islands. In fact, following the successful offer for sale of BMIT in January 2019, GO plc announced in May 2019 the distribution of a special cash dividend of €0.41 per share (in addition to the ordinary cash dividend of €0.14 per share). The special dividend was equivalent to 85% of the proceeds arising from the partial sale of BMIT.

BMIT is among Malta’s leading IT services providers and is primarily focused on the provision of data centre, cloud and managed IT services. The CEO of GO had also opined that the separate listing of BMIT will improve the company’s profile and help it to accelerate its market penetration among the local business community while providing the company with direct access to the capital markets for future expansion so as not to remain dependent on GO’s balance sheet for its funding requirements.

In order to gauge whether these recent corporate actions truly unlocked shareholder value, one must track the market capitalisations of GO plc and Simonds Farsons Cisk plc over recent years. The market capitalisation of GO plc in 2015 prior to the spin-off of MPC amounted to €358.6 million (equivalent to a share price of €3.54). GO’s market capitalisation has now grown to €431.6 million despite the spin-off of MPC via a dividend equivalent to €0.3313 per share, the disposal of 49% of BMIT (in which GO plc raised €48.9 million) and the special and ordinary dividends distributed over the years.

Similarly, the market capitalisation of Simonds Farsons Cisk plc jumped from €255.3 million prior to the spin-off of Trident to a current market value of €345 million.

Both examples clearly show the benefits that accrued to the shareholders of both GO and Farsons from the decisions taken by the respective Board of Directors to have Malta Properties Company plc, BMIT Technologies plc and Trident Estates plc independently traded on the MSE.

Meanwhile, only last week we had a further example of an important corporate action via the capital markets when a bond issuer announced the sale of a minority stake in one of its subsidiaries – namely Harvest Technology plc. 1923 Investments plc, which is itself a subsidiary of Hili Ventures Limited (the guarantor to the two bonds issued by Hili Finance Company plc) and who owns 90% of Harvest Technology plc together with the Chairman Prof. Juanito Camilleri who holds the remaining 10% of the company, disclosed that they will be disposing of 40% of their shareholding in Harvest Technology plc. The prospectus published earlier this week indicates that should the offer for sale be successful, 1923 Investments plc alone would raise a total of €12.3 million but still retain a 54% equity stake in Harvest Technology whose three subsidiaries operate in the technology and e-commerce solutions industries across Malta and also parts of Europe and Africa.

Similar corporate actions to the ones mentioned above are also very widely used across international capital markets. Only last week, American Outdoor Brands Corporation, which is listed on the Nasdaq Stock Exchange, announced that it will spin off its firearm business via a tax-free dividend to its shareholders while the outdoor products and accessories business will retain the American Outdoor Brands name. The company said that the purpose of the spin-off is to enable the management team of each company to focus on their specific strategies. In a statement to the market, the company’s Chairman stated that the spin-off "will give the investment community clearer insight into the value creation potential in each of these independent companies, ultimately driving enhanced stockholder value".

While GO and Farsons have actively carried out important transactions leading to the creation of shareholder value, some of the other companies listed on the Regulated Main Market of the MSE should also actively consider whether spinning-off or selling a minority stake in a subsidiary would generate additional long-term benefits for shareholders.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

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