The recent announcement by African Rainbow Capital Investments (ARC) that it intends to delist at a discount to its stated NAV raises questions about other options or alternatives that might be open to the Patrice Motsepe-aligned investment company.
Discount control policies, or discount control mechanisms, for closed-ended investment trusts are now standard in the UK. They are also emerging as an option in Australia’s closed-ended listed investment companies (LIC) circles. The basic premise is that the board sets a range of discounts and premiums to target. Generally, the range is from a 5%-10% discount to NAV on the one hand and a 5%-10% premium to NAV on the other.
Should the share price approach the outer bounds of the range, the board will automatically act, either through a buyback on the discount side of the ledger or via share issuance on the premium side, until the share price is back trading at about NAV.
The mere existence of the discount control policy won’t necessarily stop the share price from exceeding the target range’s limits on occasion. Still, it does signal how the board will respond to dislocations between the NAV and the share price in the future. When a dislocation does happen, the board must act boldly; it cannot apply a softly-softly approach. Over time, the market gains confidence that the board, at least on the discount side, will be there to step in as a buyer to control the discount. It is something all JSE-listed investment holding companies should have in place at a minimum.
Another common feature of the investment trust space in the UK, and another emerging trend for more recent LIC IPOs in Australia, is pre-defined dates for continuation votes. Generally, on a three- to five-year cycle, a resolution is placed on the AGM agenda for the company to be wound up if the majority of shareholders vote for it. Now, trading at a significant discount for an extended period before a continuation vote may cause this to be a foregone conclusion. However, evidence from the UK investment trust sector reveals that shareholders have also approved the continuation resolution despite significant preceding discounts in numerous cases. Shareholders passing such continuation resolutions recognise that the current style, strategy or underlying investments are out of favour in the current market environment.
Perhaps the board’s intention to offer minority shareholders a delisting price well below NAV opens the door for a white knight
Shareholders are effectively voting to continue putting their faith in the board and management that they can turn things around, or that the cycle will turn in the medium term for the underlying assets, or both. This benefits the board by giving shareholders a predefined opportunity to have their say. At the same time, if the resolution is passed, it takes the pressure off the board, as shareholders will have had their say, at least in the medium term. It also affords the board and management breathing space to implement a discount control policy or other measures to improve performance.
Curiously, ARC is going the delisting route. If the board is dismayed about the discount, why does it not explore the option of liquidation? One wonders, even with transaction costs and the time involved, whether liquidating all the assets and returning the capital to shareholders would not deliver a greater overall return to all shareholders than the proposed delisting strategy at a discount to the stated NAV. That’s a lot of liquidation-related transaction costs to reduce the stated NAV below the proposed delisting price.
It would be interesting to see the board present the estimated costs associated with the full liquidation of the portfolio assets and explain why this option is not in shareholders’ best interest. Indeed, buying out minority shareholders at a discount to NAV instead of liquidating all the assets provides a cheaper option and better overall return for the remaining majority shareholders. However, one could argue that this is not the case for minority shareholders, for whom independent directors are supposed to be looking out.
The above options are within the board’s control. However, perhaps the board’s intention to offer minority shareholders a delisting price well below NAV opens the door for a white knight to come in with a price closer to the actual stated NAV. Independent directors of ARC would be hard-pressed to reject such an offer. Could a Sabvest, Ethos Capital, Hosken Consolidated Investments, Remgro or even an international private equity player enter the fray?
There is also the not insignificant matter that this delisting process and price offered must be voted on by shareholders. When one judges the reaction online to the announcement, and specifically the delisting price offered, it appears that getting the requisite votes to carry the resolution is not a foregone conclusion by any means.
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