Mayberry rejects Berger offer

On July 24, 2017, Ansa Coating International Limited (ACI) purchased 100 per cent of shareholdings in Lewis Berger (Overseas Holdings) Limited (“LBOH Acquisition”). As a result of this acquisition, Ansa indirectly holds 109,332,222 ordinary shares in Berger Paints Jamaica Limited (BRG), which represents 51.01 per cent of the shares in issue.

As the majority shareholder, ACI has made a mandatory offer pursuant to section 19 of the Rules Governing Take-Overs and Mergers in the Jamaica Stock Exchange’s (JSE) Rule Book, to purchase the remaining BGR shares on the market. The company has offered to purchase all remaining BRG shares at a value of J$10.88 or US$0.08485 per share, payable in cash. The offer opened on September 7, 2017 at 9:00 am and is scheduled to close on September 28, 2017 at 4:00 pm.

A group of independent directors of BRG, Pokar Chandira, Michael Fennell, Warren McDonald and Milton Samuda, citing a myriad of legal and monetary considerations, has advised shareholders to accept the offer made by ACI. Chief among their reasons is the likelihood that most shareholders will accept the offer and grant ACI a majority shareholding of over 80 per cent in BRG. This would lead to the JSE de-listing the company from the exchange and ACI has made clear its intention to take the company private.

A company operating outside the ambit of the JSE is not only subject to less stringent information and reporting requirements, but also the minority shareholder must consider the fact that stocks of a delisted company are considerably more illiquid, as there is no recognised trading system to facilitate the buying and selling of the stock and even in cases where such trades are executed, they attract additional taxes.

The independent directors also warned of a possible “squeeze out” at the original offer price if ACI acquires 90 per cent or more of all outstanding shares of BRG, meaning ACI, with that number of shareholdings, could compulsory acquire all outstanding minority shares. The independent directors asserted that there is “very little chance of successfully opposing a compulsory ‘squeeze out’”, based on the advice of their attorneys, Myers, Fletcher & Gordon.

Clearly the independent directors have decided that it is in the best interest of shareholders to accept the offer. Even if ACI does not meet the 90 per cent threshold for a “squeeze out”, a shareholder controlling more than 75 per cent of the votes admissible at a general meeting will be able to pass any ordinary or special resolution without the consent of the minority shareholders. Furthermore, an uncertain dividend policy is also a consideration.

Mayberry Investments Limited (Mayberry) disagrees with the position of the independent directors of BRG, and based on its own valuation of the company, maintains that shareholders should reject the offer made by ACI.

BRG’s performance year to date has shown an increase in revenues and an improvement in profit from operations. The operating profit and net profit margins for the three months ended June 2017 was 6.87 per cent and 5.15 per cent respectively. This performance indicates that the company is benefitting from previous investments that improved processes, lowered energy costs, increased efficiency through plant & machinery upgrades as well as flat raw material costs.

As the local macroeconomic indicators continue to trend upwards, BRG is expected to see an increase in business activity. Revenue from sales is projected to increase, driven by an expansion in the construction industry, which was used as a proxy to project paint sales. Data from The Planning Institute of Jamaica (PIOJ) for the review period April – June 2017 estimated that construction grew by 1.5 per cent. This was due to an increase in building construction, led by the building out of office space to facilitate expansion of Business Processing Outsourcing (BPO).

As the construction industry continues to experience robust growth, BRG stands to improve its sales revenues; BRG continues to be the most dominant player in the decorative paints market and is continuing to increase its market share. The growth in the company’s market share should have a positive impact on revenues and margin.

For the 2017 financial year (FY), revenue is projected to increase by 5 per cent, given the expected expansion in the construction industry and the current marketing campaign to increase market share. Operating profit margin is expected to average 15 per cent for the projected period; this compares to the 2017 year end margin of 15.48 per cent. It is consistent with the investment in equipment to increase efficiency, which should continue to pay off into 2017.

For the FY 2018 year end, BRG’s earnings per share (EPS) is projected at $1.49 (2017: $1.47), while the 12 months projected EPS is $1.50. The stock is currently trading in the area of $11.23 per share as at September 21, 2017 and is projected at $15 for the next twelve months using a P/E of 10 times. Further, BRG has not closed below the price offered of $10.88 since January 30, 2017, which is also below the average price of $14.06 reported since the beginning of 2017.

This puts the buyback price of $10.88 at 37.86 per cent below its medium-term valuation. If accepted, shareholders will forgo an approximated $0.35 per share compared to the current price of $11.23, and an estimated $4.12 per share relative to the projected price of $15. It should also be noted that on the date that the offer opened (September 7, 2017), the stock closed at a price of $12.06, coming from a price of $15.81 as at August 31, 2017.

It is against this backdrop that Mayberry has concluded that the price being offered by ACI is well below the current and medium-term projected value of the BRG stock. With this in mind, it is the position of Mayberry that shareholders should reject ACI’s current offer.