Opinionista Sasha Planting 20 April 2021

The facts versus persuasive arguments: Should Adapt-IT shareholders take the money and run?

Of all the companies predicted to provide interest and excitement for investors and market watchers in 2021, small-cap IT stock Adapt-IT was not one of them. Instead, investors were expecting big things from the likes of Sasol, MTN, Mr Price and the resource stocks – some of which have not disappointed.

First published in the Daily Maverick 168 weekly newspaper.

Sasol is up 76% in the year to date and MTN is up 52%. Others, such as Naspers, Mr Price, Curro and Bidcorp, have been more “pedestrian”, rising between 13% and 16% in the year, while the miners, which ran hard in 2020, have had a quieter time, with some exceptions, like Amplats, up 38%.

Be that as it may, it is Adapt-IT that is at the centre of the corporate action right now and its share price reflects this, rising 48% in the year. The roughly 1,500, mostly retail, shareholders now have two very different offers to consider. On the one hand, there is the 550c all-share offer from the Huge Group, led by the charismatic James Herbst. He sees value in the idea of combining the software and telecoms companies to create something that is bigger and better than the sum of the parts.

On the other hand, there is the surprise (for the market anyway) offer from Volaris, a subsidiary of Canadian software giant Constellation, which wants to buy out 100% of the company at 650c a share.

The offer valued Adapt-IT at about R1-billion, a premium on its R660-million valuation just ahead of the offer.

Swirling around the two deals and muddying the water is a lot of market chatter as the various parties attempt to air their views and influence shareholders. First, there was the suggestion that a concerted share buy-back programme by the Huge Group had inflated its value artificially. Commentators argue that when the share buy-backs end, Huge’s price will tank. It’s true that Huge’s price has run, but so has Adapt-IT’s. Between 1 and 31 December (before any offers were publicly announced), the share rose from R2.65 to R4.38. True, the company kept earnings stable in 2020 on flat revenue and managed to pay down some debt, but such a jump in one month, five weeks after the release of results?

Adapt-IT’s quietly spoken CEO, S’bu Tshabalala, has made no bones about the fact that management is not in favour of the Huge offer, describing it as “hostile”.

Then, some investors are unhappy about the Volaris offer. On the one hand, the offer seems low: after all, Adapt-IT was buying its own shares back two years ago at R8.50. But, let’s face it, the world was a different place in 2018. In addition, the Volaris offer, if it succeeds, will see shareholders exit Adapt-IT – there is no opportunity to be part of the journey and share in the upside. That is unless one chooses to stay in the unlisted entity – as management will do. For many this is an unattractive option as valuations in an unlisted entity are opaque and exiting the investment is not always easy – ask the Acsa shareholders.

Questions have also been raised about the independence of independent chairman Craig Chambers, appointed to Adapt-IT’s board on 3 May 2011 and made independent chairman in October 2012. But, like it or not, the independence of directors is set out in the regulations promulgated under the Companies Act, which stipulates which directors may form part of the independent board. And the board of Adapt-IT is satisfied that the members of the independent board, including the chairperson, satisfy the requirements of the Act. Chambers will lead the independent board in providing its opinion on the offer, taking into account the independent expert’s report on the two bids.

It is easy to be swayed by strong and persuasive arguments made by people who genuinely believe their view is in the best interest of Adapt-IT’s shareholders.

In these circumstances – as in life – it’s usually better to stick to the facts.

What we have are two fundamentally different offers on the table, each with pros and cons. The Huge Group offer is a general offer that was unsolicited and made directly to shareholders of Adapt-IT. Does this offer value Adapt-IT accurately? And will the combined entity deliver the value that shareholders are looking for?

The Volaris offer will be implemented as a scheme of arrangement (which requires 75% of shareholders to vote in favour), failing which, a general offer delisting resolution (which requires the support of 50% of shareholders). The independent board will recommend that shareholders vote in favour of this offer. It seems like a fait accompli, but is the 650c fair compensation for shareholders, which have backed Adapt-IT to this point?

Irnest Kaplan, one of the few analysts to cover Adapt-IT, has weighed up the merits of the two offers. Although he leans towards the Volaris/Constellation offer, he notes that the offer does not include a premium for control. If Volaris was bidding for a minority stake, the 650c offer represents fair value. But, because it is bidding for control, Kaplan believes a premium of 25% to 30% should be added. This, he says, makes a valuation of at least 800c more reasonable.

Although the independent board is committed to recommending the Volaris offer to shareholders, all eyes will be on Nodus Capital, the elected independent expert, whose report will guide shareholders on the relative fairness of each offer. Shareholders have three choices: yes to Huge, yes to Volaris, or no to both. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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