Judging by the voting at Mpact’s recent AGM, the paper and plastics company and Caxton are no closer to sorting out their three-year feud.
Once again Caxton used its 34% holding in Mpact to block all special resolutions (they need 75% backing). And, apart from common sense, it’s difficult to see anything in the near future that would nudge either party towards a truce.
That’s a great pity. On paper they look like a good fit: both are in packaging and Caxton is also in printing and publishing; both are well managed; and both suffer from institutional reticence to invest outside the Top 40 shares. As a result they are forced to endure inappropriately low ratings.
At R24.85 a share, Mpact is on a ridiculously low forward p:e of 4.94 and well below its NAV of R30.82.
Both are well-managed and both suffer from institutional reticence to invest outside the Top 40. As a result they are forced to endure inappropriately low ratings
Caxton is only fractionally better. At 990c it’s on a forward p:e of 5.19 and a puzzling 50% discount to its NAV of R19.22.
A merger might help to overcome the institutional size bias. But on what terms?
Caxton has a little over 34% of Mpact but is reluctant to make a formal offer because, it says, it’s worried about an unresolved action brought by the Competition Commission against Mpact and a customer/competitor, Golden Era, several years ago.
Caxton is worried that if it makes an offer and ends up as controlling shareholder, the competition authorities will slap a crippling fine on Mpact. As Caxton chair Paul Jenkins said before he was silenced by the Takeover Regulation Panel, “we’re more concerned about what we could lose than what we might gain”.
The good news, for those on the sidelines with no skin in the game, is that the corporate fracas continues to make legal history.
The latest development, apart from the second consecutive AGM at which no special resolutions were passed, was Caxton’s demand in terms of section 165 of the Companies Act. It may be the first known instance of a listed company progressing a section 165 demand to the investigatory stage.
Section 165 allows a shareholder (or prescribed officer or registered trade union) to demand that a company takes legal action to protect the interests of the company. In this instance, Caxton demanded that Mpact undo its rather smart move after last year’s AGM, where the payment of non-executive directors’ fees was blocked.
In a unique response to an unprecedented development, all the nonexecutive directors were appointed to the board of wholly owned subsidiary Mpact Operations, which then paid their fees.
Last year, Mpact CEO Bruce Strong told the FM the nonexecutive directors were paid only for work done for Mpact Operations, by far the company’s largest subsidiary.
Caxton, however, believed the move was a ploy to avoid the consequences of the AGM vote. The section 165 demand called on Mpact to remove the nonexecutive directors from the Mpact Operations board and recover any remuneration paid to them by Mpact Operations.
Mpact appointed senior counsel Frank Snyckers, an “independent and impartial person”, to interrogate the matter, as required by the Companies Act. Snyckers’s conclusion to a rather lengthy report was that it wasn’t in the best interests of Mpact or Mpact Operations to take steps to litigate to have the nonexecutive directors’ appointment to Mpact Operations set aside. He also concluded it wasn’t in the companies’ best interests to seek to recover the directors’ remuneration.
The section 165 challenge was just one of the “risks arising from conduct of a major shareholder”, namely Caxton, that Mpact identifies in its latest integrated annual report. Another is reputational damage, with Caxton using “various public platforms (including the media and Sens) to disseminate false and misleading narratives and information about the company”.
In one significant instance, Mpact ensured the Takeover Regulation Panel forbade Caxton from making unapproved public statements in any form and on any platform about a possible acquisition of Mpact.
Perhaps the most significant risk results from Caxton blocking the special resolution needed for the company to provide financial assistance
While the section 165 was an interesting distraction, perhaps the most significant risk results from Caxton blocking the special resolution needed for the company to provide financial assistance. The block was apparently directed at the provision of finance for the purchase of share options for executives, but Strong says it has much broader and more troublesome implications. It doesn’t affect existing borrowing facilities, but if any of the company’s operations need more cash, debt will have to be raised at subsidiary level, Strong tells the FM, stressing that Mpact is not compromised “at this stage”.
Having spent just over R1bn on capex in 2022, substantially more than average, Mpact may be able to avoid raising debt for a short while but it’s hardly a comfortable situation to be in. And how much longer will this dispute drag on?
Asief Mohamed, chief investment officer at Aeon Investment Management, tells the FM it will be difficult to resolve as “Terry (Moolman, Caxton’s controlling shareholder) will bide his time and wait for lower prices”. He adds that liquidity in the share is drying up as investors sit on the sidelines.
That has played into Caxton’s hands. Despite a solid performance from Mpact in financial 2022, the share price has dropped from R33 a year ago. By contrast, Caxton’s is almost unchanged.
Maybe 2023 will be the year to make up. Or not.
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