Proxy voting in the battle for ownership of Adcock Ingram were due to close today. But at 2:30pm would-be acquirer CFR re-set the dates through adding an extra R1 a share, fractionally bumping up its offer. This pushes the voting date from next Wednesday to “around the end of January”. Earlier today we invited independent investment analyst Mark Ingham onto CNBC Africa’s Power Lunch to work through key issues he raised in the best research report I’ve seen so far on the contested takeover. The transcript of that discussion (below) makes for interesting reading. Interviewed later on the television channel, Ingham dismissed the fresh offer by CFR as irrelevant, saying it is nothing other than “re-arranging the deck chairs on The Titanic”.  He suggests it is “a smokescreen” and probably triggered in desperation when the Chileans realised proxy votes they had expected would not be forthcoming. Both he and RMB’s Wayne McCurrie, who was on the same show, said CFR’s bid is now dead in the water. At a CFR media conference a month ago, Adcock CEO Jonathan Louw described his company as a “bride” that had been prepared for the Chilean suitor. Seems this bride is now unwilling to consummate the arrangement. Judging by the comments from Ingham and McCurrie, it might never be. – AH  Â
To watch this CNBC Power Lunch video click here
GUGULETHU MFUPHI: The long drawn out process of the Adcock saga could be coming to an end soon as the deadline looms for the shareholder decision of CFR’s offer. Joining us now to share his views on the situation is Mark Ingham, Director of Ingham Analytics. Well Mark, you’ve drawn up a report which puts everything into perspective, but as Alec mentioned earlier proxies need to be in for those shareholders who won’t be able to vote next Wednesday?
MARK INGHAM: Correct, and shareholders make up their own minds. It’s my job as an analyst who looks at things clinically and forensically, to go through the numbers. It’s a circular that’s two inches thick with some very daunting accounting. I think it’s important that one does one’s homework and you vote – informed, if you will – and so that’s really what I’ve done. I’ve put my cards on the table and the upshot of that is I think one needs to think very carefully, and not just look at the bald gross number that’s supposedly on the table, but dig deeper into that. There are implications, not just for the shareholders now and in the future, because you’re getting cash in shares so you’ll still be stuck with a combined entity, but there are also foreign implications. I think that the claim of foreign direct investment is rather spurious.
ALEC HOGG:Â Â Why?
MARK INGHAM: The way that it’s put forward, is that this is an influx of FDI (foreign direct investment) if you will, but FDI has to be defined. This is a straightforward takeover. This is a buyout of a JSE listed company with a combination of some cash coming in, largely (almost entirely) funded by debt, and some new shares. To call it FDI and perhaps leave the impression that you’re building factories and creating new jobs is not correct.
GUGULETHU MFUPHI: Looking at the mention as well of foreign exchange controls that you made mention of regarding the offer…elaborate a little bit further on that.
MARK INGHAM: Well, there are no foreign exchange controls as such: it’s the funding mechanism that one needs to look at. There’ll be at least 600 million dollars’ worth of debt that will have to come with this deal. The balance sheet of CFR, let alone the cash flow situation of CFR, is incapable of sustaining that degree of debt. Therefore, the assets of Adcock are integral to making this deal happen. Without Adcock, there is no ability to actually fund that. Those are the assets of Adcock, and that has a significantly lower gear balance sheet than the overseas company has.
ALEC HOGG:  Keep it simple. Without Adcock Ingram being bought, they wouldn’t be able to do the transaction because they’re using the assets of Adcock to borrow, to buy Adcock.  That’s the way I understand it?
MARK INGHAM: That is correct. There are elements here, which speak to Section 44 of the Companies Act in that the acquired company – effectively – is assisting the funding.of the acquirer of the assets. In fact, new equity will be raised in Chile. The outcome of that is as yet not quite certain, and that’s another element of the deal that I’ve looked into. This therefore makes the final numbers that you get as a shareholder – the mix between cash and shares – not particularly certain either.
ALEC HOGG:  Mark, it’s a great report. It certainly is the best I’ve seen so far. You’ve unpacked so many bits and pieces, but there were a few things that did concern me. The one was that we know that CFR share price is around 119/120 (Pesos), and yet the Rights Issue seems, according to your report, they want to raise capital at a premium to that. Did I get that right?
MARK INGHAM:Â Yes, up to approximately 134 (Pesos), in fact.
ALEC HOGG:Â Â How do you raise money above your current share price?
MARK INGHAM: They got a shareholder’s resolution, and bear in mind that the Weinsteins, (that’s the family who manage the business), have 73 percent control of the company. In fact, if the deal did go through they would still have approximately 55 percent of the company. They’re getting additional capital in from outside minority shareholders. We’re not sure whether in fact they’ll go 100 percent on that either.
ALEC HOGG:  There are many complexities, but bottom line: if you were an Adcock Ingram shareholder – because that’s how you have to advise people – what would you be doing?
MARK INGHAM: I think that it wouldn’t be appropriate to accept the offer, given the uncertainties, given the implications post the deal, and particularly given the fact that Adcock Ingram – after the fact – will be in rather a poorer situation than it is today. Bear in mind that they have to pay down debt and they have a significant interest bill. Combined, it would be about 76 million dollars.  There would be a share of that…there would be a portion to Adcock. As a consolidated entity of course, they could apportion cash flows and that could mean further foreign exchange leakage.
ALEC HOGG:  The kingmaker as we know through this whole process is the Public Investment Company (with 19% of the votes). Given what your research has brought out, and given what you should know about the PIC’s philosophy is, are they likely to vote in favour?
MARK INGHAM:Â They must speak for themselves.
ALEC HOGG:  You know what you’ve uncovered through your research and you know the Developmental State approach of the PIC….
MARK INGHAM: I really can’t bring politics into it. I must look at it, as I say, clinically. If I simply look at it clinically from a balance sheet point of view, as is and what could be if you look at the scenarios and you model those… I think that even if you were a cold-hearted shareholder, you wouldn’t be voting for this.
GUGULETHU MFUPHI: What implications might this have on Bidvest’s offer for Adcock?
MARK INGHAM: Again, Bidvest’s offer is in the public domain. People know what it’s about, it’s unambiguous, and it’s a clear cash offer: first come, first served up to 34.5 percent of the company. It in no way imperils the Adcock Ingram cash flow balance sheet going forward.
ALEC HOGG:  What happens if the offer is rejected? What’s going to happen to the share price? Let’s just say that the shareholders say ‘we don’t want to take the CRF offer’? First come, first served…Bidvest gets it at 34.5 percent. What’s going to happen to the share price thereafter?
MARK INGHAM: Well, Bidvest have made it clear – R70 that they will give you – they currently have seven percent (give or take). There is no certainty, indeed, that shareholders will decide to sell all of their shares up to 34.5 percent, so that is yet to be determined. I think that given what we have at the moment, this particular vote, which goes through Wednesday…that’s obviously concentrating people’s minds. If, subsequent to that it’s voted down, then we have this option on the table.
ALEC HOGG:  But there’ll be a rush – and that’s the point I’m trying to get to – there’ll be a rush to Bidvest, until they get to 34.5 percent at R70 per share. After that’s filled, surely the share price will then go south.
MARK INGHAM: There is a risk of share price falling and in fact, I’ve had a fair value on this company of R55 for some time, and that’s actually been a stretch.
ALEC HOGG:  R55…
MARK INGHAM: Yes, so we have a bid premium , but there’s tremendous value to be unlocked from this asset if it’s done intelligently, and if it allows the company to build on its strengths. Let’s not forget that Adcock has numerous strengths, so I think there’s a lot to play for over here. I think with an enlightened shareholder, an engaged shareholder, and the resources to be able to take Adcock to the next level, I think shareholders could end up being – in the longer term – rewarded to a significantly greater degree than the option they have on the table right now.
