Some closing thoughts on Cambria Automobiles

Cambria Automobiles (LON:CAMB) announced today that CEO Mark Lavery’s offer of 82.5p to take the company private is going to succeed. The company needed at least 75% of the shares to vote in favor of the scheme, and unfortunately 75.99% of the shares now support the offer. The nail that sealed the coffin was one relatively large shareholder who decided to take shares in the private company (“Consideration Shares”). After that the writing was on the wall for the other minority shareholders.

Now that the offer is going to succeed, I think I’m forced to accept it. In my country there’s a wealth tax and this means that I need a quote for my stocks to determine their value each year. Since I have no idea how I’m supposed to come up with a value for shares in a private company, I think that forces me to now accept the cash offer.

I’d like to discuss two final thoughts about the offer. The first is about partnering with Lavery in a private company and the second about how the shareholder structure can influence the course of events and the mindset of a CEO.

1. Is this someone I want to partner with?

Even if I could accept the alternative offer and take shares in the private company, I’m not sure that I would after seeing and reading a recent interview with Mark Lavery. There were a view quotes in there that I found a bit troubling coming from someone you’d now be partnering in a private company, away from all the public company protections that are in place for outside investors.

From these interviews I came away with the impression that Lavery already saw Cambria as his private company and simply doesn’t have a partnership mindset.

Take for example this quote from the article:

“Cambria doesn’t set the share price, the shareholders do, and the truth is that they just haven’t got it. The value that we see in the business has not been realised.”

“I feel like I’m wasting my time and a lot of money.”

Bold text mine

That’s just a strange thing to say for a CEO of a public company. He’s got public shareholders and if any money is being wasted, it wasn’t his money but shareholders’ money. And there are a lot of things a CEO can do to better reflect the value of the business on the stock market, like buying back stock, larger dividend payments, unlocking potential value of the real estate, etc. If the CEO chooses not to do those things then he doesn’t have grounds to complain that he feels he is wasting his time. That’s what I mean when I say that this doesn’t reflect a partnership mindset.

An even more telling quote can be seen in this clip. Asked why Mark Lavery is the right man to take this business private, he begins his answer by saying:

“Cambria in its modern iteration is Mark Lavery.”

Now, I think any time you hear someone refer to himself in the third person alarm bells should be going off, but to hear this from a CEO of a public company is a red flag to me. That is not someone who is humble. That is not someone who sees his shareholders as partners in the business. And that’s not someone I think I can trust. Imagine Buffett opening with this line at Berkshire’s next annual meeting: “Berkshire in its modern iteration is Warren Buffett”. It’s unthinkable.

2. Shareholder structure

I tried to make this point a while ago on Twitter, but I don’t think I expressed it well. I think the shareholder structure of a company and the rules around delisting can have a major impact on the valuation of the company in the market and on the CEO’s mindset and behavior. If Mark Lavery owned just 20% of the shares instead of the 40% he actually owns – I think he owned 40% since the day he took the company public – the situation would have been much better for outside shareholders.

More skin in the game from the CEO is usually better, but this is not always true. If a company is listed on a market with relatively low delisting thresholds, outside investors take this delisting risk into consideration in their valuations. If the CEO already has 40% and there are a few relatively large institutional investors that are happy to take a relatively small premium over the market price, the company can quickly get to the delisting threshold and force others to sell. In addition, higher insider ownership leads to a smaller float and a more illiquid stock. These factors can permanently depress the valuation of a company on the stock market. Since that risk has now manifested at Cambria, were investors wrong to be a bit stingy with their valuation of Cambria in the market or did they have good foresight? Lavery said shareholders didn’t “get it”, but maybe they figured him out quite well.

In contrast, say the CEO owns 20% of the shares and the delisting threshold is 90% instead of 75%. It’s now a lot harder to get the job done. He would have to spend time and money to increase his stake gradually in the open market or by gradually exercising stock options over the years, etc. Or he would need to convince more large shareholders to sell in a privatization.

In addition he would feel more accountable to his shareholders, because owning 20% of the shares puts him in a much more vulnerable position. He would be more likely to treat outside shareholders as partners and use this partnership mindset when considering a subject like capital allocation.

So I think that is the mitigating factor here for Lavery. I’m not shocked to see a CEO act opportunistically in the face of delisting rules that are unfriendly to minority shareholders. You can see the same things happening in other jurisdictions where delistings are relatively easy to pull off, like Australia. The circumstances often dictate the behavior and the circumstances for minority shareholders in AIM-listed companies are just not good. I knew that going in and took that into account when I was buying my shares.

I think that what Cambria really needed was a large outside shareholder to keep the CEO accountable. Perhaps someone like Peter Gyllenhammar, a well-known investor in UK small caps. He was profiled in the book Free Capital, written by Guy Thomas. If I recall correctly, Gyllenhammar’s strategy often included building a blocking stake of 20-25% in order to prevent what is now happening at Cambria and to hold the CEO accountable. This can take away some of the negative perceptions of outside investors, because a delisting is now off the table unless the outside investor supports it.

It was my hope that after this takeover offer at Cambria had failed, a large outside investor would be interested to buy some of the stakes of the UK institutional investors that accepted the failed offer. If a few existing shareholders would have been willing to increase their stakes substantially, the same goal could have been achieved. Unfortunately the offer will succeed and the CEO gets a great deal.

Disclosure: long Cambria Automobiles

Posted in UK stocks.

One Comment

  1. I haven’t seem Peter Gyllenhammar’s book. Will get it, thanks.

    Sorry about the Cambria situation. There isn’t anything more annoying than a company being taken private at a silly price to the long-term investor.

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