Kobex Capital substantial issuer bid

Just a short post about a special situation that might be attractive. The Canadian company Kobex Capital has announced a substantial issuer bid for 85% of its outstanding shares.

Kobex is a cash box with no remaining operations. Management was not making progress in buying another business or making solid investments. The result was that Kobex was trading well below their net-cash value last year. This attracted activist attention from Kingsway Financial Services, which took a position and started a proxy fight.

Kobex management was ultimately able to fight off Kingsway, but not without making a promise to shareholders that it would either identify a strategic transaction or distribute the cash back to shareholders before March 31, 2016. Well, that deadline is today and shareholders will now get the option to tender their shares to the company.

The expected price for the substantial issuer bid is $0.655 per share:

The Substantial Issuer Bid will proceed at a price per Kobex Share to be determined by the Board that is expected to be approximately $0.655, being the anticipated cash value of Kobex per Kobex Share (after taking into account all expenses anticipated to be incurred by Kobex in carrying out the Substantial Issuer Bid, the Shareholders’ Meeting, and other expenses in the normal course business until the end of June 2016).

Kingsway will remain a shareholder and not tender their shares. Since Kingsway owns 14.95% of the shares, shareholders will not get prorated when they tender their shares. Kingsway will be the controlling shareholder after this transaction. New board members and a name change of the company will be proposed at the annual meeting that will take place on or before June 9.

The substantial issuer bid should be completed before June 9:

The intent is to have any Kobex Shares tendered under the Substantial Issuer Bid taken-up and paid for prior to the Shareholders’ Meeting.

The Substantial Issuer Bid will not be conditional on the completion of the other transactions contemplated by the LOI. Further information will be made available in due course as to the timing and terms of the Substantial Issuer Bid, including through the mailing of an issuer bid circular.

I bought shares when Kingsway became involved and paid around $0.55. I almost dumped the shares when they lost the proxy fight, but ultimately decided to hold on for a little while longer. It then became clear that Kobex management had to make serious concessions to their other major shareholder to get their support in the fight and that shareholders did have a good chance of seeing a transaction or liquidation soon.

The current ask price as I write this is $0.63. This means there is a potential ~4% return for a holding period of about two months. This still looks pretty attractive to me. Risks include that the substantial issuer bid is delayed, that the price offered to shareholders will be lower, or that Kingsway backs out of this deal for some reason. I don’t see the latter as likely, because Kingsway does not have to increase their cash investment in Kobex and they obviously have plans of their own for the newly named company after they gain control.

Disclosure: long Kobex Capital Corp. (CVE:KXM)

Posted in Canadian stocks, Special situations and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

5 Comments

  1. Thank you — this is very interesting indeed. Current prices are, however, a bit deterring.

    At $0.63 and assuming prices fall back to ~$0.55 if the txn fails, the implied odds on offer are 1.3 to 1. In other words, the current price suggests ~75% chance of the deal going through.

    While transaction seems like a layup, needing a 75% probability of success may be cutting it.

  2. Just a footnote: as a foreigner I usually have to pay withholding taxes over the received amount in Canada. Tender offers are treated as distributions there. Maybe you are fine in this case because, due to the accumulated losses, this is considered a return of capital instead of a distribution. Not sure about the specific rules – make sure to check it out in the official document when it is available.

    • Thanks. I have not participated in a Canadian tender offer before. I’ll make sure to pay attention to this when the official documents are released.

      • An update on this: Kobex has released an issuer bid circular that can be found via Sedar: http://www.sedar.com/search/search_form_pc_en.htm

        These type of documents give me a headache, but I think for my specific situation as a European, this section on page 29 applies:

        “Non-Residents of Canada
        […]
        A Non-Resident Shareholder who sells a Share to Kobex pursuant to the Offer will not be deemed to have received a taxable dividend as a result of the sale provided that the paid-up capital of such Share for purposes of the Tax Act at the time of sale exceeds the amount paid by Kobex pursuant to the Offer. Counsel has been advised by Kobex that the paid-up capital of each Share for purposes of the Tax Act currently exceeds the maximum amount payable for such Share pursuant to the Offer. Kobex has also advised counsel that it expects that the paid-up capital of each Share for purposes of the Tax Act will exceed the maximum amount payable for such Share at the time the Shares are sold pursuant to the Offer. Accordingly, this summary assumes that no dividend will be deemed to be received by a Non-Resident Shareholder on a sale of a Share to Kobex pursuant to the Offer.

        A Non-Resident Shareholder will not be subject to tax under the Tax Act in respect of any capital gain realized on the disposition of a Share pursuant to the Offer.”

        So I don’t think this will be treated as a taxable dividend in my case. I’ll probably check with my broker to make sure.

        There is a specific section in the circular for US shareholders, so their situation is different from mine and the above does not apply.

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