Some Saturday speculation and game theory for you guys. Thanks in advance for indulging me with this long(ish) post. This analysis is based on publicly available information.I will present evidence to support my theory, and no personal attacks are intended.
I was intrigued by this comment on the MSP forums:
It sounded like a threat. Who is trying to manipulate shareholders? AVA has bought MSP, the manager of one of MSP's divisions has been promoted to head of the whole group, which is now called AVA Risk Management. Everything has been disclosed to the market. So what does this comment mean? Who is manipulating whom?
Looking into MSP's biggest shareholders I saw this:
AVA recently filed a Form 604, notice of change of interests of substantial shareholder, in the wake of the MSP buyback and cancellation. This group of 5 with 10.01% did not (and I can't find a ceasing to be substantial shareholder dec for them). Presumably, their share has increased- my maths says to 10.16%
This means that without this group there are 8,254,726 shares still outstanding, or 1.7%.
Ytrewq (QWERTY backwards) seems to be suggesting that the 10.01 block cannot be manipulated.
This seems like a classic "greenmail" situation, but to avoid allegations and personal attacks and comply with HC's TOS, let's just call them the "BlockBloc". If you assume that each of the 5 holds an equal share, then any one of them could sell to AVA or in the MSP buyback and bring AVA over the 90% "compuslory acquisition" threshold. As others have pointed out here, in order for the 90% number to have any meaning at all AVA would have to launch a second takeover bid for MSP, going through the whole rigmarole of legal and accounting costs, experts reports etc again.
It sure looks to me that these 5 individuals thought that by buying up exactly 10.01% of MSP stock, they could block the merger. Now why would they do this? I can think of 2 scenarios:
1. Long-term MSP shareholders are genuinely concerned about the direction of the company, and believe that it would be better off without the merger. They believe so passionately in this, that they are prepared to put themselves in a worse financial position over it just to make a point. None of the other MSP shareholders were concerned, just these 5 (and perhaps some of the outstanding 1.7%)
2. Some people got together and thought it they formed a blocking stake for the merger, they could prevent the 90% compulsory acquisition. Because of this, the company would have to make a special deal for them that was better than what all the other shareholders got, and they would make more money from this short term play than they could as medium-to-long-term holders of AVA.
YMMV as to which of these scenarios is more plausible; Ytrewq's statement certainly points to #2.
Assuming #2 is what is going on, what does this mean for AVA?
It seems that AVA's options are:
1. Launch another takeover bid, at a price the BlockBloc would accept 2. Delist MSP 3. Do nothing 4. Buy one of the BlockBloc out at a premium, thus removing the power of the rest
In scenario 1, the BlockBloc wins, all the other shareholders lose, and the company loses. The group is left with much less money, because it is in BlockBloc's pocket.
In scenario 2, the company wins (didn't have to spend the money acquiring stock), the other shareholders win (less corporate overheads=more profit, less market confusion=better stock price, less AVA shareholders = less dilution), the BlockBloc loses (less liquidity, and MSP is unlikely to ever pay dividends).
In scenario 3, the company still wins (because they acquired MSP and are now managing the business as a single entity), but not as much (because they are carrying listing expenses for 2 stock codes); the shareholders lose (because the group is carrying unnecessary expenses and confusion in the market weighs down both stocks); and the BlockBloc loses (unless you think that MSP stock is somehow going to perform very well without the buyback, as new buyers suddenly emerge to fight over the remaining 1.7% then someone magically appears to buy the whole 11.85% at a giant premium).
In scenario 4, the company loses the battle (costs more money) buts wins the war (the takeover), the shareholders lose because of the cost but win because this is all behind us and only 1 person got a deal that was not fair to the other shareholders; and BlockBloc loses, except for the lucky one who made outsized profits.
Game theory suggests to me that #2 is the most likely outcome, and #1 is by far the least likely outcome. In fact you could call it the "in your dreams!" outcome. They would be going hard for #4 before they surrendered to #1, and I don't see any signs they have tried that at all. Only the 5 and certain people in the company or maybe a broker or two (eg Cannacord) would know that - if any of them would like to comment on this post, please do.
"as a result of a takeover, scheme or arrangement or other control transaction, the entity only has one or a small number of remaining security holders and so its continued listing can no longer be justified"
An unacceptable reason:
"to deny minority shareholders a market for their securities in order to coerce them into accepting an offer from a controlling shareholder to buy their securities"
Part of the application must detail:
"what, if any, arrangements will be in place to enable security holders to sell or otherwise realise their securities in the lead up to, and/or after, its removal from the official list"
Any shareholders of MSP have certainly had ample opportunity to sell or swap their securities by now. The takeover is finished and the company is offering to buy their stock, so what coercion could their possibly be?
The key clause from the ASX I think is this one:
Have these been met?
1. Yes, 88.07% - and climbing.
2. Unknown, but likely. For our purposes the question is: are the remaining 1.77% held by more than 144 people? MSP doesn't seem like a widely held stock, and the buyback has been going on for months now, a compulsory buyback of unmarketable parcels was completed.
3. Yes, Page 33 of the Bidder's Statement. I note that the other statements of intention there have all been done now.
4. Yes.
5. No, there does not seem to have been an application for delisting within a month after the close of the takeover.
Could delisting happen within 12 months of the takeover bid (which was announced August 24), and without shareholder approval?
It seems like the conditions have been satisfied. The on-market buyback is scheduled to go until 28 February 2019, but
12 months after the takeover bid closed is 22 Dec, 2018. Until then it is probably a matter of the solidarity of the BlockBloc, who are holding on in the vain hope that their former vision of glory will be achieved.
I presume that the 5 members of BlockBloc feel confident in their solidarity, "all for one and one for all", and there is no member of their group who would ever act in their own self interests first. But they've been locked in this play for 9 months now, and it isn't really going in the direction they were hoping for. Is that likely to change in the next 6 months? The scenario they planned for didn't happen. Their position is greatly weakened. It seems like they are holding on in the hope that the world will magically return to their game plan. However this seems unlikely, given that it is easier and cheaper for the company to do nothing.
As a long-term supporter of AVA, I am comfortable - though disappointed - to wait another 6-9 months of operating MSP as a majority-owned subsidiary with listed entity reporting requirements and overheads. It's a short term reduction of profits for no benefit to anyone (it doesn't even the BlockBloc, as I have shown above). The added overhead expenses and headaches for the company basically are there to provide 6 more months of hope for the BlockBloc that their dream comes true: Fergus decides to spend company money on launching another takeover bid with the sole purpose of buying 1 or more of them out at a huge premium. There is no logical reason for him to do that, when he can just do nothing and wait. So here we are...still.
The other scenarios some have suggested on the MSP forum is that the price slowly and steadily creeps up until the deal is done, but in my analysis this is wishful thinking.
I'll leave you with a thought from @crackpot, which I whole-heartedly agree with (!)
Note the posting date. Here we are, 10 months later, same MSP price, and now Fergus is doing his thing. It seems the only capital market game left is this blocking stake. Let's hope the BlockBloc do the right thing by the rest of the AVA and MSP shareholders, stop playing their game sooner than Christmas and make money with us together as AVA investors. They would be much better off now with AVA shares at 1:4 than making us all wait 6 more months so they can have delisted MSP shares that will never pay dividends - ie worthless paper. I hope they will use game theory and logic themselves.
(20min delay)
