A hypothetical scenario in a hypothetical stock
Let’s say that there is a company in an unpopular and forgotten part of the world. Let’s say that this company is active in a boring, stale sector and that it always seems to find more capex to spend, but has seemingly little additional growth to show for it. Let’s say that this company used to be a a high dividend payer, but cut their dividend with the expressed intent to instead make stock buybacks. Let’s say those buybacks never materialized for several years, while the stock languished. Let’s say the company never shows profits on the last line.
Let’s say that the company instead of those buybacks had to execute a rights offering in order to finance a merger. Let’s say that this took 9 months to do and that they knowingly did so into a shareholder base which didn’t contain even one large shareholder of flesh and blood, and of which a sizable minority got their shares unwillingly in their lap via a share dividend from another company. Let’s say that this company has an EV of about $10 billion of which about $3 billion is equity. Let’s say that it is notoriously subject to currency devaluation and have a lot of debt in dollars.
Do you like the setup here? I suspect not, but let me add a few details.
After the rights offering, a French billionaire starts buying shares in the company and he files a 7% stake. Additionally, in November a French bank files for a 6% stake. This French bank has strong associations with the French billionaire. In a year-end filing which hit yesterday, the bank says it now holds roughly 8% of the company. This French guy, by the way — a multibillionaire in his own right — is also the son in law of another French multibillionaire, a man so rich he happens to be the richest man in the world.
Shortly after the new year, news leaks that the company is in negotiations about a takeover. A PE firm and a wealthy Private Individual of non-French origins wants to buy it. This Private Individual is based in Miami, which coincidentally is the same city which the company has its HQ in and where the CEO lives. The company doesn’t have operations there, though. The Private Individual, apart from living in the same city, does seem to share some other striking similarities in his biography with the CEO; they originally come from the same part of the world, which is the parts where the hypothetical company operates. And they are roughly the same age. The Private Individual also has experience being a CEO in the same sector, and finished off his job there a couple of years ago by executing a giant merger. He now runs a family office looking to invest back into the region he hails from.
The CEO of our hypothetical company, who has a remarkably nice smile, has controlled the board ever since the former largest owner skipped out by dividending out its stake. He has been executing a pivot into a pure play, cleaning up the income statement, buying in minorities, selling off non-core assets. He’s not quite done yet. For example, currently, infrastructure assets are being separated out. Some analysts have estimated their value at roughly $1.5 billion on a standalone basis. They have a neat peer comparison in a newly spun off entity by its largest competitor. It’s a rather good situation since those assets usually fetch a significantly higher multiple on their own, and can bear debt.
Anyway, we could further speculate that the CEO might be quite concerned about the the new French shareholder. There is no way to know for sure, of course. But the CEO has steered this ship, building up value slowly over time. And he does get a fair bunch of share grants every year.
Sure, the shareholders haven’t seen any profit yet. Rather the other way around. But if they are in it for the long haul, they need not despair. Of course, I — the CEO — can only guarantee that there is a long haul if the board allows me some more time to work. Time is of the essence.
Maybe the French are an awfully impatient bunch? Maybe they want to do something unfair to our shareholders, just for a quick buck? Maybe, sadly, there is no long haul for the patient shareholders here. But some nosy newcomer is certainly not deserving of earning all that money at the expense of others. Maybe — if that’s really how it has to be — I, the one who did all the work, deserve it over this new opportunist?
But there are some issues to resolve here. Yes, we would like to pay the outside shareholders fairly, but there are a handful of bonds at the corporate level. They have low interest rates which is good, but they also have tight EBITDA covenants of 3x and a change of ownership clause at 50%. It’s too onerous to call all the bonds, it costs additional money and we aren’t even sure yet if we can finance it. But if we could, it would get very expensive in terms of future interest payments. Yes, sure this company could conceivably be run with higher leverage under the right circumstances, but now is not the time for racking up new debt. We probably can’t buy all the shares outstanding here. The French guy won’t sell his shares to any offer we can make, but will he go above 50% himself? Doesn’t seem likely either, for all the same reasons. So it’s a stalemate?
No, at this rate the Frenchman will be able to control the board shortly. He’s munching shares over the market like there is no tomorrow. And he has almost unlimited funds. He has said that he supports our strategy, but there’s no real way we can trust that. They always say that before they have to tip their hand.
What are we supposed to do? Can we tender for 49.9% of the shares? Can we sell off parts and stave off this raider? Is there actually something we can do? Preferably something were we all get paid and maybe I can keep my job, please? We have leaked a really low-ball price for our — sorry — I mean, the PE takeover, and the shares seem stuck at that level. But is the low price actually high enough to price out the French from buying more shares? Will our cash-flow heavy Q4 results finally boost the stock price? Or do we need to tender for stock at a higher level than the leaks, so that we have a chance to keep control?
Or maybe I’m not that worried. Maybe we are just looking at the best way to pay shareholders here. We have several interested parties, both for all of our business and for parts of it. I’m being objective and doing my job. We are just making sure that we do the absolutely best for all involved before I’m done, but clearly the company is attractive for several parties with deep pockets.
Does seem awfully nice either way, doesn’t it?
Now, let’s say that this company’s name is Millicom (TIGO). Are you still interested?
No, didn’t think so.
But I am.
From someone who has patiently managed to lose lots of money in TIGO over many years: you did a nice job describing the current situation. Thanks.