AMA reorganization

News of a possible offer from Blackstone was released by the AFR in its weekend edition 27-28 January and this was followed by an AMA release to the ASX on 29 January, confirming that a "confidential, non-binding, conditional and indicative" proposal had been received. At the AGM on 29 Nov 2017 the directors said they had been in the United States talking with smash business people, but they didn't say anything about the negotiations which one would assume were then underway.

According to the AFR, "AMA told the ASX on Monday the indicative proposal values the panel business at $530 million "on a cash-free, debt-free basis and is subject to numerous conditions including completing of satisfactory due diligence and internal approvals by Blackstone, and agreed transaction structure and documentation".

Here we are a few weeks later with an offer of $508m for panel, presumably amended to reflect debt, and some simple assumptions that the rump businesses will be worth the same 10.7x multiple as ascribed to panel.

Even if that is true (and the market is yet to decide), the total valuation of AMA on demerger is estimated to be around $1.18-1.22. This is less than the $1.235 AMA reached recently after a strong run up in late 2017 from a low of 83.5c. Blackrock investments revealed itself to have taken a 5% significant shareholder interest in AMA on 21 December.

This says to me that there is no premium built into what is effectively a buyout offer. I agree with the previous comment that Blackstone should be buying the whole of AMA and paying both fair market value for it and a premium which reflects the gains it expects to make out of dealing with the parts as it intends.

Ordinary (non-transaction related) shareholders own about 380m of the 531m shares on register. These roughly 2500 shareholders will be required to vote on 24 August for or against the demerger proposition. For the demerger to get up, there needs to be a 51% majority of voters controlling 75% of the voting capital. The demerger documents state that, in the event of 51% of voters not agreeing with the plan, AMA will go to court to seek to have the headcount rule overturned and an exception made to allow the demerger to go ahead regardless, if 75% of capital is in favour. Since the major stakeholders are excluded from this vote, it really will come down to the little guys to decide what happens, although even if they do not agree the big players will try to force it through the courts.

It is worth looking at AMA's sales and margins as shown in the last annual report.

Panel
- gross margin 57%
- sales $323m

Bullbars
- gross margin 49%
- sales $25m

Cables
- gross margin 30%
- sales $15m

Remanufacturing
- gross margin 39%
- sales $10m

From this it is apparent that the ACAD businesses are not as profitable as panel and therefore you would think that, if 10.7x is a fair multiple for panel, the ACAD businesses should have maybe a 7 or 8x multiple only, suggesting a demerged ACAD price of say 25c instead of the 35c they indicate.

On timing, AMA's annual report is due out in draft form by Friday 31 August. The demerger meeting is scheduled for 24 August. AMA generally releases its reports right on the deadline, so it is a fair bet that shareholders who must vote at the demerger meeting will not know what results AMA has posted for FY17-18.

Ordinarily, a dividend would be announced soon after the annual report was finalized in September. There is no mention in the demerger documents of any dividend policy. It may be that Blackstone has no intention of paying a dividend for this year's operations of AMA in which Blackstone had no involvement. OTOH, the main shareholders of AMA are all in line to receive substantial payouts in dividends, should such a policy be enacted. You would expect that the directors who are also shareholders would act in the best interests of all shareholders and insist that there be a dividend payout following FY17-18.

In my view, there needs to be a statement from AMA as to

1) the timing of release of the FY17-18 results, so that the 24 August meeting is informed, and
2) an announcement of dividend policy, regardless of whether the demerger goes ahead.
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