Bell deal: is something brewing?

The pending R53 a share delisting offer for Bell Equipment — a South African maker of rugged mining and construction hardware — would appear to be a happy outcome for everyone.

The offer represents a 17-year high for the stock and a more than 80% premium to the 30-day volume-weighted average price of Bell shares on the JSE as of July 11. Shareholders get taken out of a long-languishing share and the Bell family gets to run its business away from the glare of the JSE.

Going private with the Bell family will be a consortium of South African funds: Peregrine Capital, Peresec and a recently incorporated entity called Zenithar.

But as Bell’s largest minority shareholder allowed to vote on the deal (Shipyard Capital, holding 1.3-million shares), we are not pleased. Several aspects of the deal suggest that something more is afoot, and that the offer shortchanges shareholders dramatically.

To begin with, there is the unusual activity in Bell’s shares. Between October 2023 and April 2024 three supposedly unrelated entities — Peregrine Capital, Peresec and Zenithar — bought out Bell’s top four minority shareholders (Sanlam, Allan Gray, Ninety One, and former Grindrod boss Ivan Clark).

If it was unusual for sophisticated funds to take large positions in a notoriously illiquid microcap share, the manner in which they made their purchases was more unusual still. Bell’s circular published August 13 shows that the three entities each bought up to just shy of the 5% disclosure limit and that two of the three entities made purchases only on the days that the other entity also made purchases. Most incredibly, disclosures filed with the Companies & Intellectual Property Commission show that every director of Zenithar was also a director of Peregrine Capital at the time of the purchases.

That wasn’t all. Bell has long been in the crosshairs of corporate governance scolds because its officers and directors own so few shares. Yet in October and November 2023, a number of insiders bought shares. Some were first-time buyers and some were directors not of Bell itself but of its subsidiaries. It would seem that the excitement in the organisation ran deep. About the same time, Bell’s CEO was resigning, to be replaced by Bell family scion Ashley Bell. This was surprising, because Ashley had previously resigned his executive functions at the company. Why was he stepping back in?

The ‘October coincidence’ got me thinking: was Bell preparing itself not for a delisting, but for a larger liquidity event, such as a sale to a strategic acquirer?

All of this activity — management changes, insider purchases, huge changes in the Bell share register — got under way in about October 2023, which is a highly significant date. In 2021, the Bell family holding company (IAB) bought John Deere’s 31% stake in the business for R10 a share. As part of that purchase, IAB granted John Deere a contingent value right (locally known as an agterskot) that would require IAB to pay John Deere more money if IAB went on to sell its shares for a higher price in the following two years. That agterskot expired in about October 2023. This “October coincidence” got me thinking: was Bell preparing itself not for a delisting, but for a larger liquidity event, such as a sale to a strategic acquirer?

Then I noticed the structure of the offer itself. IAB had hired top-flight bankers, and those bankers had had years in which to structure a watertight deal. Yet instead of assuring a favourable vote by getting a few large shareholders to sign “irrevocable” agreements to vote for the deal, IAB is presenting shareholders with a deal on which only 15% of shares will be allowed to vote. As turnout seldom approaches 100%, and because 25% “no” votes are sufficient to vote down the offer, it would seem that the fate of this deal has been left to something like 2-million to 3-million shares (that is, 2%-3% of the share capital). It does not appear that IAB cares much whether this offer passes or fails.

What could explain this constellation of incongruous facts? Why did things start to happen only when IAB was once again free to court strategic acquirers? Why did a bevy of insiders purchase stock? Why did the CEO resign, only to be replaced by a Bell family member who had previously resigned his executive functions? Why did sophisticated funds pile into a share that they have no hope of getting out of, absent a large liquidity event? Why was the offer structured to be blockable by a handful of attentive minority shareholders?

I believe there is a simple answer: this is a stalking horse offer, meant to flush out a higher offer from a strategic acquirer. Acquisitions of unique heavy equipment makers typically happen at about 1.6 times book value, which would value Bell (on year-end 2024 numbers) at about R100 a share. And if IAB began to approach strategic acquirers in the spring of 2023, the gulf between Bell’s share price (about R16) and fair value would have been too large for a mergers & acquisitions team to credibly take to its board. But a bona fide offer by the family puts a floor under the share and makes a R100-a-share takeout price more palatable to a strategic acquirer.

If our theory is correct, it also makes sense of the surprise CEO transition last year. Bell’s CEO wouldn’t want to stick around if he knew that he was soon to be sold on to a larger organisation, nor would another journeyman operator want to step into what was likely to be a very short tenure. Thus (so my theory goes) a family member stepped back in to shepherd Bell through the upcoming transactions.

Shipyard will be voting against the offer, and hopes that other minority shareholders will vote against it as well. After all, if the people who know the most about the business — the Bell family — aren’t selling their shares at R53; why should we?

Mitchell is the managing member of Shipyard Capital