We have written at length in recent months regarding Thinksmart’s (TSM) capital management strategy (see ThinkSmart: Think of the risks and Time to think about ThinkSmart). The entire process of undertaking this off-market buy-back has highlighted numerous corporate governance concerns.
At the very least the board of TSM placed minority shareholders in a position where they were given an option to tender their stock at below its intrinsic value in order to avoid being stuck in an investment with limited liquidity, a possible de-listing from the ASX and the potential for one shareholder to effectively control the company.
Outcome of the off-market buy-back
TSM’s off-market buy-back was completed on January 27, 2015. Of the proposed 50% buy-back, 34.2% of issued capital was bought back.
I would appear that the company always wanted to buy back $20 million of stock. 50% would have been acquired at 33 cents per share but shareholders forced the company to pay 42 cents per share to acquire this amount.
Incredibly, this price was above the independent experts valuation range of between 33 cents and 39 cents per share. If this was an appropriate valuation we are not sure how the board will justify the price paid to continuing minority shareholders.
In any case, the buy-back price of 42 cents was applied to all shares bought back, even those tendered at below this level.
For shareholders that tendered their stock at a fixed price below 42 cents per share, the buyback resulted in a good outcome, with 100% of tendered shares being sold at 42 cents per share.
For shareholders that tendered stock at the ‘buyback price’ their tenders were scaled back. Specifically, these tenders had 5,797 shares plus 33.53% of any amount over this level bought back.
How does completion of this buy-back leave shareholders?
TSM’s chosen form of capital management, in our view, leaves more questions than answers. Continuing shareholders are faced with a number of rather concerning prospects:
- Uncertainty around strategy and continuing to be listed in Australia;
- An executive chairman who controls between 32% of the company which will increase depending on the outcome of the 10% on-market buy-back;
- Significantly reduced liquidity.
In our view the key drivers of TSM going forward are further capital management initiatives (TSM will retain net cash of around $15 million post buy back) and whether or not the company continues to be listed in Australia.
Unfortunately, we have very limited ability to forecast or value either of these two factors. Accordingly we have discontinued coverage on the stock.