The board of Adapt IT has recommend that its shareholders reject the offer of Huge Group to acquire all of the company’s issued shares.
This comes after Huge Group had in January made a general offer to acquire up to 100% of the entire issued share capital of Adapt IT.
The board said based on the opinion of an independent expert it had appointed, the Huge offer was “unfair and unreasonable”.
Huge offered to acquire shares in Adapt IT, in consideration for which Huge would issue 0.9 ordinary shares in Huge for each Adapt IT share, should the offer be expected.
“This swap ratio is based on a reference price of 613 cents per Huge share and an implied price of 552 cents per Adapt IT share,” the Adapt IT board explained.
However, independent expert Nodus Capital’s detailed valuation of Adapt IT shares and the Huge offer consideration, in accordance with Regulation 90 of the Companies Regulations, concluded that a fair price range for Adapt IT was R7.00 to R9.09 per Adapt IT share.
The board therefore recommended that shareholders should not accept the offer.
Volaris offer boosted Adapt IT shares
In its response circular to the offer, the Adapt IT board outlined why Huge’s implied price of R5.52 per Adapt IT share was materially below the fair price range.
It stated while the Huge offer was higher than the traded price of Adapt IT at the time when the offer was made, this changed after software company Volaris also made an announcement to acquire more than 50% of Adapt IT shares.
“The announcement of the Volaris Offer and subsequent trading in Adapt IT Shares in response to the Volaris Offer has resulted in trading at prices significantly above the value offered in the Huge Offer,” the board stated.
“As a result, Adapt IT Shareholders who wish to realise their Adapt IT Shares have alternative opportunities to do so for cash at a price greater than that of the Huge Offer.”
In addition, Adapt IT’s board said there were qualitative considerations and concerns around the form and value of the Huge offer consideration which prevented it from concluding that it was reasonable.
“The qualitative considerations arise from the fact that the Huge offer consideration is in the form of Huge shares, the value of which raises the issue that a significant liquidity disadvantage attaches to the Huge shares,” the board said.
“Huge has acknowledged that liquidity in the trading of Adapt IT shares is greater than that of trading in Huge shares. The result is that Adapt IT Shareholders who accept the Huge offer will receive Huge shares which are not as easily tradeable as Adapt IT shares.”
“Moreover, it is apparent from the response to the Volaris offer that not all Adapt IT shareholders intend to accept the Huge Offer, which means
that if a minority of Adapt IT shareholders accept the Huge offer and acquire Huge shares, they will hold a less liquid Huge Share without the benefit of any improvement in the liquidity of Huge Shares that would result from all Adapt IT Shareholders acquiring Huge Shares.”
BEE status a problem
The board further stated that Huge’s BEE Status as “Non-Compliant” would adversely impact Adapt IT.
“Huge falls 45.1 points below the minimum 55 points required to achieve the lowest Compliant BEE status, Level 8,” it stated.
Adapt IT said that Huge’s claim that the Level 1 BEE status of Adapt IT Proprietary Limited, the main trading entity of Adapt IT, would remain even if the acceptances of the Huge offer was 100%, was not correct.
“This cannot be correct without substantial changes in Huge’s own BEE compliance, none of which have been proposed or described, in the
Huge offer circular and must therefore be discounted,” the board said.
“In the absence of such substantial changes on the part of Huge, there is a concern that the BEE status of Adapt IT Proprietary Limited would drop from Level 1 to Level 6, undoing a decade of transformation and posing a substantial risk to Adapt IT, including putting Adapt IT in breach of several major customer contracts which have contractual undertakings regarding the maintenance of Adapt IT’s BEE Scorecard level.”