Adapt IT’s share price has declined from R7.46 on 31 May to R6.30 on 18 June despite receiving higher offers from Huge Group and Volaris.
Late last month, Huge Group increased its offer to Adapt IT shareholders from an effective R5.52 per share to R9.09 per share.
This was done by increasing its originally announced swap ratio from 0.9 Huge shares for each Adapt IT share to 1.37 Huge shares for each Adapt IT share.
A week later, Volaris increased its cash offer from R6.50 to R7.00 per Adapt IT share to make their offer “fair and reasonable”.
What is curious is that the share price declined after the higher offers were announced. It is now moving away from the offer prices instead of moving towards it.
The chart below shows the Adapt IT share price and the revised offers from Huge Group and Volaris.
Richard Cheesman, a senior investment analyst at Protea Capital Management, told MyBroadband the discount is within the range which can be expected considering the time until the deals will be concluded.
He expects the Adapt IT share price to increase and narrow the discount to the R7.00 per share cash offer price as it approaches the time of the deal.
Cheesman further highlighted that there are risks associated with the Adapt IT offers.
The Volaris offer, for example, will initially significantly dilute Adapt IT’s BEE credentials.
The Competition Commission recently blocked the sale of Burger King SA to Emerging Capital Partners because of the BEE credentials of the buyer.
Volaris is a Canadian company, and as such, it does not have any black economic empowerment credentials.
The Adapt IT-Volaris deal is therefore at risk of an adverse Competition Commission ruling, similar to Burger King SA.
However, Volaris has committed to maintaining Adapt IT’s BEE credentials. This may dilute any shareholders which choose to remain in the delisted company.
Allegations of armed assault against Adapt IT CEO Sbu Shabalala is also a concern.
Shabalala, who is on special leave to “attend to personal matters”, said the allegations against him are without merit.
His absence during this crucial period and uncertainty around his future at the company are, however, of some concern.
Despite the risks, Cheesman said Adapt IT may be a buying opportunity with decent upside if the deals go through.
Huge Group CEO James Herbst told MyBroadband he believes the Adapt IT share price is now trading how it ought to be trading relative to a cash offer of R7.00.
“It is the trading just after the Volaris offer announcement that was difficult to explain,” he said.
“At the time, I felt that there was no logical reason, other than one reason, for Adapt IT’s share to be trading at or above the Volaris offer of R6.50, given deal risk, the time value of money, and tax.”
This one reason, Herbst said, became evident when Adapt IT announced that Blacksheep, Ampfield, and Jefferies had bought significant shares in Adapt IT at the offer price.
“This was presumably to keep their Adapt IT shares and remain invested in an unlisted, privately-held South African subsidiary company of a Canadian holding company,” he said.
“This activity smacked of concert party warehousing to me so that Volaris could get its scheme approved and exit Adapt IT shareholders for R6.50, now R7.00.”
This raises the question of why the Adapt IT share is not trading up to the Huge offer price of R9.09.
Herbst said the answer to this question lies in the inability to arbitrage the Huge and Adapt IT share.
“The arbitrage that exists is to sell Huge, if you can, and buy Adapt IT,” he said.
“However, this is a waste of time given Huge’s tight shareholding, the inability to get a borrow on Huge shares, and the periods for delivery of the Huge consideration shares.”
The question is now what existing shareholders in Adapt IT — other than those who have signed irrevocable undertakings in favour of Volaris — are going to do.
“There is no flood of selling shareholders. This must mean that cash is not the alternative they are going to accept,” he said.
These shareholders have two choices:
Retain their shares in Adapt IT, which will probably be delisted and leave them with an investment in a privately owned company with basically no minority protections they enjoy through the listed Adapt IT share.
Swap their Adapt IT shares for Huge shares.
“We think the latter is most likely,” said Herbst.
MyBroadband asked Adapt IT for comment, but the company said it’s inappropriate to speculate on the short-term volatility in its share price.