Last week Adapt IT announced that Volaris has increased its cash offer from R6.50 to R7.00 per share to make their offer “fair and reasonable”.
This followed a report from an independent expert, Nodus Capital, which concluded that a fair price range for Adapt IT was R7.00 to R9.09 per Adapt IT share.
The higher Volaris offer followed a week after Huge Group revised its offer by increasing the swap ratio from 0.9 to 1.37 Huge shares for each Adapt IT share.
If one uses Nodus Capital’s value of R6.65 per Huge Group share, the swap ratio equates to an offer of R9.09 per Adapt IT share.
Nodus Capital has now declared Volaris’ revised offer fair and reasonable. It added the fair-value range of an Adapt IT share to be between 1.05 and 1.61 Huge Group shares.
This means Adapt IT shareholders now have to choose between the two bids which offer significantly different value propositions.
If shareholders accept the Volaris offer, they take the cash and exit Adapt IT which will be delisted from the JSE.
With the Huge offer, they remain invested in a combined Huge Group and Adapt IT.
Huge Group CEO James Herbst previously said Huge Group and Adapt IT are “better off together”, remaining listed, and creating more value for shareholders.
View from Huge Group Chairman Duarte da Silva
Speaking in his personal capacity, Huge Group chairman Duarte da Silva told MyBroadband their bid offers Adapt IT shareholders significantly more value.
He explained once the Volaris scheme is approved, Adapt IT shareholders will be left in limbo and stranded without liquidity to dispose of its share.
“At best, the price will reflect a discount to R7.00 per share because it must, in the absence of more bidding, take into account the time value of money and the risk of transaction failure due to regulatory obstacles.”
“Even Nodus Capital refers to the risk of a possible collapse in the Adapt IT share price if the offers vaporise, maybe to below the levels seen before Huge made its initial offer.”
Da Silva said current trading volumes are probably as good as it is going to get, unless Adapt IT shareholders accept the Huge Group offer.
He added that holding onto shares in an unlisted Adapt IT — one of the options associated with the Volaris bid — is even more dangerous.
“The company will be run on global protocols, loaded up with transfer pricing and the IP exported offshore,” he said.
“As a stranded minority, value will be swept away without any protection or ability to liquidate. This is not commercially viable for any shareholder, and it is disingenuous to represent it as an option. It is Alcatraz for participants.”
View from Huge Group James Herbst
Speaking in his personal capacity, James Herbst told MyBroadband that Huge Group’s revised offer price is R9.09 per Adapt IT share, and not some other price that Adapt IT’s independent board is trying to reference.
“It is, according to the independent board, fair and reasonable, is higher than the revised Volaris offer, and must, by definition, be more fair and more reasonable than the revised Volaris offer,” he said.
Herbst said the revised Volaris offer of R7.00 per Adapt IT share is “disappointing and not nearly good enough”. “It will not appeal to the Adapt IT shareholders who are not already bound by it,” he said.
The revised Volaris offer is far too low to compete with the revised Huge Group offer, he said.
He said outside of the Adapt IT shareholders which have already given an “irrevocable undertaking” to support the Volaris bid, the Huge Group offer is compelling.
The Volaris offer poses the risk of getting squeezed out at the lowest point of the Adapt IT share price value range.
“Adapt IT’s share price and trading volume can tell someone a lot about the value of the two offers,” Herbst said.
In the days following Volaris’ initial offer, the demand for and supply of Adapt IT shares increased substantially.
These demand and supply sides intersected at the initial Volaris offer price of R6.50 per share, in significant volume.
“The sellers of Adapt IT shares on the offer side were many and were the existing shareholders of Adapt IT. These must have been Adapt IT shareholders who did not think that the Adapt IT share price could go any higher or that a higher offer would be made,” he said.
“The other Adapt IT shareholders who did not sell or offer to sell their shares, must have believed that the Adapt IT share was worth more, otherwise they too would have sold.”
At that time, the buyers were also many measured by the number of shares bought, and included Blacksheep Master Fund, Sunset Amplified, and Amplified Holdings.
These buyers bought shares in Adapt IT with the purpose of holding them rather than accepting the R6.50 per share Volaris cash offer. This was done without knowing whether Volaris would be successful.
“The recent decision of the competition authorities relating to the Burger King competition filing must have these new shareholders rattled now because they may be left stranded without Volaris — unless they are concert parties to Volaris with a prearranged exit,” he said.
The key takeaway from this analysis is the volume of shares traded, which was exceptionally high.
This supply and demand analysis for Adapt IT shares can be contrasted against a supply and demand analysis for Adapt IT shares before and after the announcements of Huge Group’s revised offer and then Volaris’ revised offer.
When Huge Group announced its revised offer, the demand side for Adapt IT’s shares increased while the supply side decreased.
The Adapt IT share price increased, but nowhere near the trading volume when Huge Group and Volaris made their initial offers.
When Volaris announced its revised offer, the demand side for Adapt IT’s shares decreased and the supply side decreased. The Adapt IT share price decreased, and the trading volume decreased.
“No one is going to buy an Adapt IT share at R6.84 today to accept R7.00 in December 2021, even in the unlikely event regulators can consider and approve the Volaris merger by such date,” Herbst said.
It is also doubtful that anyone is going to buy a listed share today to convert it into an unlisted share in December 2021.
“Anyone who buys today must be buying to accept the revised Huge Group offer. At R6.84 per Adapt IT share, using a swap ratio of 1.37, an investor can buy a Huge share for R4.99 when its market price is R5.98.”
In all probability, Herbst said, the liquidity in Adapt IT shares is going to dry up now and the concerns about Huge Group’s liquidity will equally apply to Adapt IT’s liquidity.
“If Adapt IT shareholders keep their shares they are going to get stranded and squeezed out at R7.00 less tax, or be left in a foreign owned private company, with zero minority protection or an exit mechanism.”
“I think it is patently obvious that the revised Huge Group offer is the best offer and should be accepted.”
No comment from Volaris
MyBroadband asked Volaris for comment about its offer, but the company did not respond.