The Comvita Takeover: Plan B

Spoiler alert: There is no Plan B. What shareholders saw was what they didn’t get. The chance to exit Comvita shares at NZc 80 per share courtesy of the Florenz takeover bid has flown. But if there was a Plan B, what would it look like? And what fate awaits shareholders now that Comvita’s future hangs in the balance? Bruce Roscoe comments.

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By Bruce Roscoe

More Comvita shares were voted in favour of the Florenz Ltd takeover proposal in November than against, but neither threshold of 50% of total shares in issue of 75% of total votes cast was met.

The percentages achieved were 43.1 (against: 31.9) and 53.7 (39.8). But this was not a lower hurdle general election, and Florenz had sought a mandate by broad consensus for its proposed ownership.

Through due diligence, the position of Mark Sadd, a former Comvita chief financial officer and now Florenz chief commercial officer, and through participation in the same industry, Florenz may know nearly as much about Comvita as there is to know. It knew enough to ready a war chest of about NZD115m —　NZD56.4m to buy out shareholders for value about equal to their equity, and NZD59m to repay banks by 1 March.　　

Florenz or other suitors could accumulate shares through NZX. Under the Takeovers Code Comvita is a “Code company”, which means a company of size with a large shareholder base. After a suitor acquires 20% of a code company, it cannot further increase is holding without making a takeover offer.

Such an offer can be “full” (for all outstanding shares) or partial, and conditional upon reaching 50%. Control of management can be achieved at 51% ownership but a major decision, such as delisting from NZX, would require 75% ownership. As a company for whom doing laundry on the balcony of NZX would be anathema, Florenz can be expected to deploy its war chest in other battles. And in the event of a receivership, it can cherry-pick Comvita assets as it pleases.

Smart Money

Comvita posted updates on the takeover vote to NZX on 11, 12 and 13 November. Smart money read the first update (27.8% for; 20.2% against) as a probable failure of the bid, trading volume increased to 407,658 shares from 6,088 shares the day before, and the price fell 11.5% to NZc 69. The heavy-volume selling continued through 19 November, sinking the price to NZc 50. An orderly exit from this stock seems unlikely.

Receivership would entrap shareholders, as trading would be halted. Each share represented NZD1.14 in Comvita net debt at 30 June. Receivers will attempt to sell assets until each NZD1.14 is recovered. Problem is, each share is backed by only NZc 78c in net asset value.

Bankers as Beekeepers

If Comvita directors’ worst fears are realised, the company’s bankers will take control of the business, sidelining management. They may even don beekeeping suits to survey what the company’s balance sheet describes as “biological assets” — the beehives. They must take care not to upset the bees through inept handling, lest they be stung.

The bankers would operate the company through the receivers they appoint. At this late stage, creditors prevail over owners, and shareholders as owners lose their voice. 

Pink Sheet Penny Stocks

Comvita shares now share traits with penny stocks on pink sheets, named after the colour of the paper on which the National Quotation Bureau of the US printed stock quotations after its establishment in 1913.

Today the pink sheets refer to an over-the-counter market for the unlisted securities of companies which do not meet stock exchange listing criteria. Comvita shares were first publicly traded after quotation on the Unlisted Security Market of the NZSE (now New Zealand Exchange) in September 2002.

Fortunes are difficult to make but easy to lose on pink sheet stocks. They typically belong to small companies with profit records as uneven as the uncertainty of their futures. Many are priced at less than USD1, demonstrate wide price swings when traded, which may not be often, and show a disregard for laws of both finance and physics.  

Trading in pink sheet stocks usually is the preserve of broker dealers. Individuals are discouraged from investing in them due to volatility and risk.

Bruce Roscoe is a Japan-resident researcher and former foreign correspondent and securities analyst.