The only surprising thing about the proposed delisting of mini-industrial conglomerate Kairos is it’s the first such “distressed” scheme of arrangement on the JSE this year. Sure, we’ve seen other delistings over the past two years and currently Telemasters and Universal Industries are deliberating a dignified shuffle off the JSE. But with so many small cap companies trading at below tangible net asset value it’s a wonder that (so far) only
Kairos Industrial Holdings [JSE:KIR] has pitched a pauper’s proposal to delist.
The interesting thing about the delisting proposals promulgated by Kairos is shareholders are being offered a rock bottom buyout price of 1c/share, valuing the company at less than R3m!
That might look like a cheap shot with the Kairos share price bouncing – for most of the past 12 months– between 4c and 10c on the JSE.
But Kairos is a business that looks, operationally speaking, on the ropes. Both mainstay operations – the Witbank Brickworks and BroKrew Industrial (a mining ventilation specialist) – are running at a loss, and NAV in the year to end-February 2011 was negative to the tune of 25c/share.
One can’t fault the blunt logic of Kairos’s directors, who suggest there’s “no ongoing merit in retaining the listing of Kairos…” and that management can’t afford the distraction of regulatory and shareholder issues. The company will save R2m/year – not much, but every little bit counts when a company is churning a R27m loss from turnover of R188m.
At a cursory glance, observers may be tempted to relay a “take the money and run” message to Kairos shareholders. In fact, that’s what Finweek believes was the exact advice from SA Shareholders Association chairman
David Sylvester to a small group of Kairos shareholders who convened in Cape Town on Monday last week.
Sylvester may well be correct in his assessment that putting up a fight against what some may perceive as a derisory buyout offer would be an effort in vain. After all, Kairos’s shareholders do appear to have the option of remaining on board the unlisted company.
But why put up a fight either to retain a listing or a better buyout offer? There’s not much tangible that can be gleaned from Kairos’s annual report and any prospective value is really hinged on a number of “ifs” and “buts”.
Aside from the obvious ongoing turnaround efforts at the current Kairos operations, there will undoubtedly be some haggling about the future value of the company’s development properties in Witbank and its coal reserves.
Gut feel is that Kairos won’t battle to earn a “fair and reasonable” tag from an independent adviser, which means those believing the controlling shareholder in Kairos – Shefa Equity – is walking away with loads of future value are going to have to clamber aboard the unlisted vehicle.
While we concur with Sylvester’s view that resistance is probably futile, we do have some concern about the precedent a successful Kairos delisting would set. Currently, there are a slew of small cap companies – many that listed over the past five years – that are seeing their recovery plans dismissed with some disdain by a sceptical market.
There’s only so long a CEO or controlling shareholder can look without temptation at a share price that bears no resemblance to the company’s intrinsic value. If Kairos slips quietly off into more private pastures then who knows how many struggling minnows will be inspired to follow suit…