What is a 'fair' price for delistings?

This week it was announced that the controlling shareholders of the Belgian shipping company Compagnie Maritime Belge (CMB) and those of the Belgian Pairi Daiza zoo intend to delist their company. When the controlling shareholders want to delist their firm, they have to make a public bid for all outstanding shares. Once they get a sufficiently large percentage of the shares (in Belgium the threshold is 95%), there can be a squeeze-out. In the squeeze-out, shareholders who did not yet sell are basically forced to give up their shares at the bid price. This raises an important question: what price should the controlling shareholders offer to the other shareholders? What is a fair bid price?

For the delisting bid to succeed, the bid price should be higher than the market price before the bid was announced (*). The market price reflects the share value for stock market investors. Why would they sell to the controlling shareholders if the bid price is lower than the price at which they can sell on the market? Then of course the question is: how much higher should the bid price be? Sometimes, the controlling shareholders propose a price which is considered too low, and the bid fails. In September 2012 Liberty Global, which at the time owned 50.4% of the shares of the Belgian telecom operator Telenet, announced that it would offer to buy the other Telenet shares at € 35. This price implied a 12.5% premium compared to the last market quote before the bid. Nevertheless the bid failed. Liberty Global managed to convince only 8% of the shareholders to sell their shares. The Lazard bank, which had been asked by the independent directors to value Telenet, estimated the value of its shares to be substantially higher than the price offered by Liberty Global, between € 37 and € 42. Since then, the market price of Telenet, which is still listed, has risen to more than € 50.

In the case of CMB, of which the controlling shareholder Saverco (an investment vehicle for  the Saevereys family) holds 50.8% of the shares and which has been listed for more than 100 years, the bid price is € 16.20. This is 20.45 % higher than the last market price before the bid. Is this a good price? Opinions are divided. The Belgian newspaper De Tijd estimated the share value by first estimating the value of the ships of CMB.  After deducting the outstanding debts and including the value of some other assets, they obtained a CMB share value of € 14.11, leading De Tijd to conclude that the offered price is 'correct'. Others disagree. According to blogger Alberken, the offer is a joke and the value of CMB shares is much higher at € 21.20. Unfortunately, Alberken does not let us know how he obtained this value.

Who is right? First, any net asset value as the one calculated by De Tijd should be considered an absolute minimum. If the going concern value (i.e. the value if the firms keeps on operating) of CMB is not higher than its liquidation value, it means that CMB is basically destroying value.

If the bid price is substantially higher than the stock price before the offer, there seems to be an inherent contradiction in the argument that bid price is 'too low'  As a shareholder, you had an even lower price before the offer, so what are you complaining about? Well, the market price of a share does not necessarily reflect the 'real' value per share. When the controlling shareholder offers a share price which is lower than the actual value, he gets a larger part of the value than what he is entitled to. (**) Actually, they are very likely to do so. Why would they otherwise offer to buy the shares? This only makes sense if they think the value of the shares is higher than the price they pay. That is, unless the delisting itself creates value. When company is not listed anymore, direct and indirect listing costs are avoided and the controlling shareholders have more flexibility in pursuing whatever they consider appropriate objectives. This might lead them to pay a price which is higher than the value of the stock when listed and still keep some of the extra value for themselves. Fair enough.

Nevertheless, in many delistings there is a worry that after the delisting, the controlling shareholders will take actions that they refrained from doing while the company was listed, even though such actions would have substantially increased the company value. Specifically, they could decide to sell (parts of) the company at a higher price than the one they paid for the delisting. In a previous post, I explained how the Belgian entrepreneur Marc Coucke (who remarkably is also involved in the Pairi Daiza delisting) delisted his Omega Pharma company in 2011, paying € 1.2 billion, and selling it three years later for € 3.6 billion. Of course, we do not know whether it was already the intention of mr. Coucke in 2011 to sell a few years later at a much higher price, but such transactions understandably raise fears among investors that they might get a bad deal at the delisting. It would be interesting to know the extent to which the buying shareholders in delistings in Continental Europe sell their company a few years later at a significantly higher price. If you know of such research, let me know!

While it is unfair that the controlling shareholders pay a low delisting price if they intend to sell at a higher price after the delisting, it gets more complicated when the controlling shareholders delist because they think the market undervalues the company. Controlling shareholders will often be better able to assess the true value of a company than outside shareholders, who have less information about the prospects of the firm. As Pierre Huylenbroeck notes and as you can see in the chart to the right which depicts the CMB share price in the past five years, the bid price of € 16.20 is quite low compared to previous prices. About a year ago CMB shares traded at more than € 20. The delisting decision might be a smart move of the controlling Savereys family to profit from current undervaluation in the market. Is this unfair? I don't think there is a straightforward answer to that question. One could argue that all investors are entitled to a share of the company's real value in proportion to their shareholdings, and no shareholders should benefit from the fact that they have more information about the company than others. But how far can you stretch that argument? If a company decides to repurchase its own shares because the management thinks the shares are undervalued, is this also unfair? Then many share repurchase programs should be considered unfair. The shareholders who do not sell win at the expense of the sellers. Where should we draw the line between acceptable and unacceptable share tradings? In the capitalist system it is accepted that some investors are smarter than others and benefit from this. That is why Warren Buffett is such a celebrated person. A good rule seems to be that no share trade should be based on one party having inside information that is not available to the other party. Inside information is to investors what doping is to athletes: it gives them an unfair advantage. Unfortunately, this is very hard to determine.

Addendum: Gertjan Verdickt points me to a study by Ettore Croci and Alfonso Del Giudice who find that the operating performance of delisting European firms does not significantly improve in the three years after delisting. However, their data do not allow them to investigate whether the firms are sold after delisting which might be an important factor, as Croci and Del Giudice note themselves.

(*) Once the bid is announced, this information will be incorporated in the market price, which therefore does not provide a meaningful comparison anymore.

(**) For the sake of argument, let us assume that the total value of CMB would be € 7 billion. If the controlling shareholders pay € 16.20 per share, this would allow the controlling shareholders to keep € 7 billion - (€ 16.20 * 35 million CMB shares) = € 133 million for themselves, instead of sharing it with the other shareholders.