Mustek bidders like Grinch who stole Xmas

ONE can't help but compare the proposed management buyout of Mustek [JSE:MST] to Grinch, the mean character in a children's tale who stole Christmas.

While most investors are celebrating the fact that the JSE is not far off all-time record highs after the disaster of 2008, Mustek management is plotting to steal a quality IT stock out from under the noses of investors.
 
CEO David Kan and the Trinitas Private Equity Fund are looking to take Mustek off the exchange at a price of 555 cents per share. At first glance, this looks like quite a generous premium - especially considering that the stock kicked off the year at 250c.
 
The deal has been described as "opportunistic" by a number of stockbrokers, and looking at the stock over a five-year period one can understand their concerns.
 
In March 2007, the stock was trading at around R11 a share and on top of that has always been a consistent dividend payer.

Prior to the announcement of the buyout, the stock was offering around 3% dividend yield - indicative of its ability to generate cash.
 
Analysts also point out that Mustek is at the bottom of its cycle; businesses are still hesitant to invest in IT infrastructure and at the moment return on equity within Mustek is less than 10%.

Management would not be buying out the business if they did not think they could sweat it to run more efficiently.
 
When Mustek delivered full-year results for the year ended June 30, it delivered 57c in headline earnings per share and had a net asset value (NAV) of 595c.
 
This means that at the buyout price, investors are paying less than 10 times earnings, and 9% less than the NAV of the company.

While not directly comparable, a mature company like Datatec [JSE:DTC] is trading on nearly 20 times earnings and it's not paying a dividend.

A world class company like EOH Holdings [JSE:EOH] can be bought for 10 times earnings in the listed environment, and would command a premium if a similar offer were made to shareholders.
 
Research in both local and international IT markets indicates that companies are looking to up their spend on hardware and infrastructure in 2011/2012 as the global economy rebounds.

This translates into increased investment in hardware, which will benefit the likes of Mustek.
 
While Kan and co claim to have the support of around 55% of the shareholders, investors could do well to kick up a stink and oppose the offer. A patient investor could surely wait for a greater payoff than the 555c on offer.

It would appear that the Grinch of Christmas 2010 has a name - and it's walking off with Mustek.