Quarto Group

Quarto Group (LON:QRT) is a UK-listed publisher that focuses on these six categories: children’s books (39% of revenue), cookery, home and garden, art and craft, heritage, and wellbeing.

In January 2018 I published a post about the company behind a paywall on this site, presenting it as a speculative special situation. A new shareholder of the company had emerged in the person of Chuk Kin Lau, the CEO of Hong Kong listed Lion Rock Group Ltd (HKG:1127). Some months before Lau reported his holding, an unnamed party had made an offer for the company, but those discussions were ultimately terminated. I put two and two together and figured Lion Rock was probably the bidder (I don’t think this was ever confirmed anywhere btw) and that Lau was now taking a different approach and buying shares on the open market. I figured a bid was still very much possible and that it seemed like a good bet to buy some shares alongside Mr. Lau.

In the end, a takeover offer from Lion Rock for Quarto didn’t materialize. What did happen is that Mr. Lau took effective control of Quarto, replacing a majority of the Board members. That’s where my post ended, in May of 2018. I closed that post by saying I was going to hold on to my shares for a while. I wanted to see how things played out and I really liked Mr. Lau’s track record at Lion Rock (the company’s old name was 1010 Printing). There’s an old VIC write-up about 1010 Printing that describes Lau’s track record in some detail.

The situation three years later

It’s now three years since I last updated that post, and I still own my Quarto shares. And they’re trading at a lower level today. So I can safely say that the special situation didn’t play out the way I hoped… You could make an argument for selling your shares in a situation like that, because holding on to your shares means some serious “thesis drift”. It had really become a turnaround situation at that point.

Still, I really liked Mr. Lau’s track record and he had turned around other (printing) businesses before. Selling my position at such depressed levels (shares ultimately dropped to below 50p in 2020) just seemed like a bad idea to me.

Quarto’s business finally seems to have turned around after three years. In March this year the company announced its results for 2020 and I increased my position after the announcement. I still think the shares are trading at an attractive level today. I’ll post some summary financials and discuss some of things that caught my attention in the company’s latest annual report.

I should also note that I have no idea where you can buy this stock now. Most brokers won’t let you buy Quarto. My previous broker did, but they have been acquired by another broker recently. It looks like I’m only able to reduce my position now and not buy any additional shares.

Here’s some recent financial data:

Share price: 91.50p
Shares outstanding: 40,889,100
Market cap: £37.4m -> $52.8m -> The company’s functional currency is the US Dollar, even though it is listed in the UK! The company is incorporated in Delaware, United States.
Net income 2020: $4.6m
P/E ratio: 11.5x
Adjusted net income: $5.5m
Adj. P/E: 9.6x

The calculation for the adjusted earnings can be found on page 72 of the annual report for 2020. The exceptional items and the amortisation of acquired intangibles seem like reasonable adjustments and I do think headline earnings are a bit understated as a result. I think the acquired intangibles are non-cash charges relating to previous acquisitions, but it isn’t explained in any more detail in the report.

Debt reduction

Quarto has gone through a tough few years with high debt levels plaguing the company. The company finally looks to have brought the situation under control though. In January 2020 the company raised ~$17m in an open offer at 68p. The debt was reduced and Lion Rock Group also provided further financial support.

Looking back, I think the previous management just did a poor job at allocating capital. They tried to do everything at the same time and keep everyone happy:

  • The different imprints of the company continued to invest in “pre publication costs”
  • The company continued making acquisitions as late as 2016, despite elevated debt levels
  • Shareholders continued to get dividend payments as late as 2016

It just seems that the CEO at the time did not have the resolve to do what was needed: disappoint some of these people by saying “no” to them and get the debt level down. Fortunately, Mr. Lau doesn’t suffer from that problem. A successful operator in a very competitive industry like book printing in China knows the importance of keeping costs down and managing cash.

The net debt levels have come down a lot since Lau took control during 2018:

  • 2020: $19.7m (includes a $2.4m CARES Act loan)
  • 2019: $50.5m
  • 2018: $60.4m
  • 2017: $64.0m (previous management)
  • 2016: $61.9m (previous management)

The company has been in survival mode these past few years. Now there should finally be some room to invest in growth again.

Backlist and pre-publication costs

The company actually has quite a bit of financial flexibility due to its backlist and the investments in pre-publication costs. Pre-publication costs are the costs and overheads incurred in the development of book titles prior to their publication. They are capitalized and show up on the balance sheet as a non-current intangible asset. These are substantial investments. Prior management invested a whopping $35.6m in 2017 (2016: $37.2m) in pre-publication costs. The effects of the management change is most easily seen in the level of pre-publication costs in the last couple of years:

  • 2020: $20.3m
  • 2019: $23.8m
  • 2018: $29.7m
  • 2017: $35.6m (previous management)
  • 2016: $37.2m (previous management)

This is the accounting treatment for these pre-publication costs:

These costs are amortised on a straight-line basis upon publication of the book title over estimated economic life of three years or less, being an estimate of the expected useful economic life of a book title. The estimated economic life is based on the annual sales profile of the Group.

Source: Quarto AR 2020, page 67. Bold text mine.

But some books end up being quite successful and have an economic life that far exceeds these three years. For instance: page 13 of the annual report shows Quarto’s top ten sellers in 2020. Their number one title was Squishy Human Body, netting almost $2.0m. The year of publication for this title was 2006! Although that was an extreme example, four of the top ten titles in 2020 were published before 2018. So I think there’s value in Quarto’s backlist of 15,000 titles. It will keep producing substantial revenue, even when investments in pre-publication costs are reduced for a while. This backlist gave the company time to restructure operations.

Free cash flow

The two factors above: reduced investment in pre-publication costs combined with the revenue from Quarto’s backlist, meant that the company produced a lot of cash over the last few years.

This was the company’s free cash flow:

  • 2020: $16.6m
  • 2019: $17.4m
  • 2018: $8.4m
  • 2017: $7.7m (previous management)
  • 2016: $4.9m (previous management)

Of course the free cash flow of the last couple of years is probably inflated. The reduced investment in pre-publication costs does have an effect over the medium term. The company must continue to invest in new titles to replenish the value of the backlist. Individual book titles do become less wanted and less relevant over time.

Outlook and capital allocation

The company seems quite positive about the near-term outlook. During the pandemic, online sales have increased and replaced some of the much reduced revenue from brick & mortar retail sales that were hit by lockdowns in the US and the UK. As the Covid restrictions are eased, the company expects to maintain online sales at current levels and to see brick & mortar recover:

Quarto is in a good position to grow in 2021. The gradual return of the high-street bookshop, gift outlets and heritage sites from Easter onwards will revive bricks-and-mortar retail sales, whilst on-line sales are not expected to diminish from their already high levels.

Source: Quarto AR 2020, page 10. Bold text mine.

Now that the debt level looks manageable and earnings visibility has improved, the company is also looking at potential acquisitions:

‘Bolt-on’ acquisitions: Quarto has built its business through organic growth and a series of acquisitions. Our acquisition objective is to increase our market share in the six key categories: Cookery, Home and Garden, Art and Craft, Heritage, Children’s, and Wellbeing. We will focus on ‘bolt-on’ acquisitions of publishers or imprints that could generate synergistic value by leveraging Quarto’s procurement, operations, and sales platform.

Source: Quarto AR 2020, page 9

This is also echoed in the Lion Rock annual report:

The publishing business is an important strategic focus for us to diversify vertically and will be the Group’s new engine of growth. Working closely with Quarto management, we have managed a successful turnaround of the business after a 3-year effort. It is now a much more streamlined operation with a publishing program that is focused on 6 key book categories. With Quarto in much better financial shape now, we will focus on growing the business organically and via bolt-on acquisitions.

Source: Lion Rock AR 2020, page 6

Minority shareholder protection

There are some concerns about minority shareholder protection now that Mr. Lau / Lion Rock control 40.8% of the shares. I made a mistake in my original write-up, figuring that Lion Rock would have to make an offer for all the shares once they had crossed the 30% ownership threshold under the City Code on Takeovers and Mergers in the UK. I overlooked the fact that the company is incorporated in Delaware, United States and that this means that this provision of the City Code does not apply!

That could mean that shareholders can get screwed in a scenario where Lion Rock decides to delist the company and they’re left holding shares in a private company. Richard Beddard has written a post “When is a bargain not a bargain?” that highlights come of the concerns about Lion Rock and some other issues like limited disclosure about digital revenues and issues with dividend withholding taxes.

I’m still fairly comfortable with these issues. I’ll make a few points about the risk of a delisting. I don’t think it is likely the company is going down this path. If the company does end up delisting in the next few years, I think it is likely that they’ll at least combine this with an offer to buy-out minority shareholders at a price that is above today’s share price.

These are the main reasons why I think this:

  1. Regulatory issues due to trade tensions between the US and China
  2. The recent open offer
  3. The rejected takeover in August, 2019
  4. Treatment of OPUS shareholders by Lion Rock
  5. I’ll discuss these four reasons.

    1. Regulatory issues due to trade tensions between the US and China

    As I wrote at the beginning of this post, I believe Lion Rock is likely to have been the bidder for Quarto in August, 2017. One of the problems that ultimately led to termination of the discussions was this:

    It became clear that the regulatory approvals required by the bidder to complete the proposed acquisition were increasingly less likely to be granted on the timeline first indicated.

    Shortly after this Lion Rock and Mr. Lau began acquiring shares in the open market. I don’t think it has become any easier to get regulatory approval for a Hong Kong listed company with large Chinese operations to take over a US domiciled business. The trade war and all the associated tensions have made this very challenging, I think.

    As an example, another Hong Kong listed public company, Analogue Holdings (HKG:1977), owned 51% of a business domiciled in the US called Transel Elevator & Electric (TEI). In August 2020 they decided to sell 2% of that business back to the local management in order to avoid a control position in TEI. Their explanation about this transaction:

    In August 2020, the Company reassessed the regulatory, operating and business environment in the U.S. and determined with the board of Transel Elevator & Electric Inc. (“TEI”) that it was in the best interest for TEI to have TEI’s local management increase their equity stakes in TEI due to latest changing Sino-U.S. tension. On 10 August 2020, Anlev (US) LLC, an indirect wholly-owned subsidiary of the Company, disposed of 1 and 1/3rd of a share of common stock of TEI, representing 2% of the equity interests in TEI, to Mr. Mark Gregorio (“Mr. Gregorio”) at a consideration of US$1.4 million (equivalent to approximately HK$10.92 million) (the “TEI Disposal”). Immediately before the TEI Disposal, TEI was a 51% owned subsidiary of the Group and was owned by Mr. Mark Gregorio as to 29.4%.

    Source: Analogue Holdings AR 2020, page 109

    Like Lion Rock, Analogue Holdings is a Hong Kong listed company, domiciled in Bermuda. I think this transaction shows that taking control of a US listed company has become more problematic now and that some companies are even taking steps to get below a 50% stake.

    In January 2020, the company raised capital through an open offer. This was structured in a way that Lion Rock and Mr. Lau stayed below 50% of the outstanding shares:

    If no qualifying shareholders (other than the Underwriters) take up their Open Offer Entitlements, the Underwriters are expected to subscribe for all of the New Common Shares available pursuant to the Open Offer which will result in 1010 Printing, Lion Rock Group Limited (parent company of 1010 Printing) (“Lion Rock”) and Chuk Kin Lau (the ultimate controller of Lion Rock and 1010 Printing and CEO of the Company) (together, the “Lau Parties”), together, holding such number of Common Shares so as to give them control of 49.25 per cent. of the enlarged share capital following Admission […] (Bold text mine)

    They also brought in a new European shareholder, the Giunti family, who operate a publishing company in Italy. They now own 20% of Quarto’s shares. So it looks to me that Lion Rock and Lau have been careful not to exceed the 50% threshold.

    2. The recent open offer

    The company raised new capital from investors as recently as January 2020 in an open offer (comparable to a rights offering in the US) at a price of 68p per share. I think you can expect some legal issues if soon afterwards you decide to delist your shares and inflict damage on the shareholders you’ve just raised capital from. Their shares will be a lot less valuable when they’re turned into unmarketable shares in a private company. I don’t think you can really get away with that without making a buyout offer to all shareholders prior to a delisting. But of course, then Lion Rock would become the majority owner and we’ve just seen above that going above 50% ownership could be problematic.

    Another interesting detail is that after the open offer, Lion Rock acquired 400,000 shares at 100p per share from Herald Investment Management. That was almost double the market price at that time. The reason was that Quarto didn’t satisfy the free float requirement after the open offer:

    After the completion of the Quarto Open Offer in February (details as stated in the Previous Announcements), Quarto failed to comply with the free float requirements set out in UK Listing Rule 6.14 (“Free Float Requirement”), being that 25 per cent. of Quarto’s common shares must be held in public hands by persons located in the European Economic Area. On 4 September 2020, 1010 Printing acquired 400,000 Quarto Shares from Herald Investment Trust plc (“Herald”), an Independent Third Party, at a consideration of £400,000 (equivalent to approximately HK$4 million) (excluding stamp duty and related expenses). The acquisition of 400,000 Quarto Shares from Herald by 1010 Printing resulted in Quarto satisfying the Free Float Requirement. After the transaction, Herald’s interest in Quarto dropped to below 5% and its holding was counted as shares held in public hands.

    Source: Lion Rock filing of Oct. 9, 2020 (.pdf), page 3

    So Lion Rock jumped through some hoops to comply with the current rules and to stay below 50% ownership. It just seem hard to argue you can pay 100p to one shareholder for a part of his shares and then simply delist your stock and screw all the other shareholders. But I don’t think they have an intention to go down this route.

    3. The rejected takeover in August, 2019

    Quarto received a takeover offer (behind a paywall) in August, 2019 for 100p per share. The offer was made by Richard Hurowitz, a US investor and publisher of quarterly “journal of ideas” The Octavian Report. The company confirmed it had received an offer, but rejected the approach:

    The Board considered the Proposal following its receipt and concluded that it was not in the best interests of the Company or its stockholders, nor did the Board believe it capable of being consummated.

    As documented in its announcement of 16 January 2020, Quarto needed to renegotiate its existing debt facilities prior to 31 March 2020, and hence following the Board’s rejection of the unsolicited preliminary Proposal, it continued with its already well-developed plans to raise additional monies via an open offer to shareholders alongside the renegotiation of its debt facilities. The Board has not received any further approaches from Octavian since October 2019.

    Again, it seems pretty hard to argue the Quarto board would be fulfilling its fiduciary duties if they reject a 100p all-cash offer (before the turn around) and then delist the company a few years later. Especially after raising new capital from investors at far lower prices after the proposal was rejected.

    4. Treatment of OPUS minority shareholders by Lion Rock

    Lion Rock acquired a majority of the shares of then Australian listed company Opus Group. I haven’t followed that situation closely, but I don’t think minority shareholders there were treated unfairly. The company was ultimately renamed to Left Field Printing (HKG:1540) and the listing was transferred from the ASX to the Hong Kong Stock Exchange. Shareholders received shares in the “new” company. A transaction like this could be problematic if your broker doesn’t support the market to which the listing is transferred.

    It would have been possible for Lion Rock to take the delisting route for OPUS in Australia, but instead they transferred the listing to a different stock exchange.

    Conclusion

    I still like Quarto today, even though the situation is completely different from when I entered my position as a special situation. The company seems to have finally turned around their business. There is a concern whether minority shareholders will get to benefit alongside the major shareholder if things do keep improving over the next few years. I think there are some reasons to think that minority shareholders will be treated fairly.

    But I could be wrong about this. As a small shareholder you are in a vulnerable position. Take a case like Cambria Automobiles (LON:CAMB), which I also own, and where the CEO is attempting to take over the business at, what I think is, a bargain price. If that attempt succeeds, shareholders there will either receive the lowball offer in cash or elect to get non-transferable shares in a private company. Not a good outcome for minority shareholders there if this scheme passes.

    I think this is harder to do and less likely in Quarto’s case for the reasons mentioned above, but it remains a risk.

    Disclosure: long Quarto Group, Lion Rock Group and Cambria Automobiles

Posted in UK stocks.

15 Comments

  1. Quarto reported H1 2021 results on August 3: https://www.londonstockexchange.com/news-article/QRT/half-year-report/15084450

    Revenue was up 21% against the Covid impacted H1 2020. Net income was $2.1m vs a loss of $3.0m in H1 2020. Net debt is now $16.4m. Quarto’s business is quite seasonal and the second half of the year is usually stronger. One concern that was noted in the report are the freight costs which have exploded, increasing 3 to 4 fold since year-end.

    At a share price of £0.835, the market cap is now £34.1m, or around $47.2m USD (Quarto’s functional currency). This still looks quite cheap to me. Apparently Mr. Lau and Lion Rock agree, because Lion Rock bought some more shares on August 6 according to this Hong Kong filing: https://di.hkex.com.hk/di/NSForm3Bprint.aspx?fn=DB20210810E00116&lang=EN&dia=Y.
    That buy increases their stake from 40.78% to 41.09%.

  2. The full year results for 2021 are out: https://www.londonstockexchange.com/news-article/QRT/final-results/15372582

    Sales were up by 19% and net income was $9.9m (USD). It does look that the turnaround actually succeeded. Net debt was just $5.5m at the end of 2021 and post-balance sheet date they repaid another $15m to C.K. Lau and 1010 Printing.

    They really clamped down on expenditures the past two years: capex was just $111k in 2021 and $33k in 2020.

    The trend of reinvesting less into new titles compared to the previous management continued in 2021. Investment in pre-publication costs was $20.2m, while their “amortization and amounts written off pre-publication costs” was $31.0m. So it was another big source of cash generation. Free cash flow for 2021 was $17.4m.

    I don’t know if the $20m is a sustainable number, but the fact that revenue was up this year and was at similar levels to 2016 and 2017 (previous management) seems like a good sign. They’ve now had three full years of significantly decreased investments in pre-publication costs and the business still performed well in 2021, with revenue up 19%.

    The share price is ~127p, giving a market cap of ~£52m or ~$68.4m USD (Quarto’s functional currency). So trading at around 7x earnings. The company did warn about high shipping prices, so perhaps that will hurt their performance this year. But I’m still happy to hold this at the current price.

  3. Looks like they decided to try to delist the company. Any thoughts on it?

    I was thinking that they would at least try to make an offer first and therefore I am pretty sure I will likely vote against the delisting. Its also interesting that Orbach wasn’t part of the irrevocable undertaking for the delisting.

    • Hi Anonymous,

      Yes, I’m disappointed that Quarto’s management has decided to take this step and the way they plan to execute it.

      First, for any other readers, the press release about the delisting and potential tender offer can be found here: https://www.londonstockexchange.com/news-article/QRT/circ-re-proposed-cancellation-admission-of-shares/16231686. More importantly, the circular that contains some essential information about the potential tender offer was published here: https://data.fca.org.uk/artefacts/NSM/Portal/NI-000086504/NI-000086504.pdf (.pdf) and on Quarto’s website: https://www.quarto.com/aboutus/investornews.aspx

      Here are my thoughts. I could be wrong about anything below, but this is how I understand the delisting and potential tender offer at the moment.

      To complete the delisting they need 75% of the votes cast *and* 50%+ of the votes of “Independent Shareholders”. The first criterium of 75%+ of the votes cast should be a formality since they already have irrevocable undertakings of 72.4%.

      The 50%+ is more uncertain, but it mainly comes down to whether the stake of the Giunti family (mainly held under “Montecristo 2019 Srl”) is deemed to be independent or not. Since they own 22.3%, I think they can almost single-handedly decide whether the second criterium is met *if* they are deemed to be independent. My thinking about this point: Lion Rock/1010 Printing owns 50.1%, so to meet the second criteria, they would need 50% of the remaining 49.1% of the votes. That would be 24.6% of the total number of shares outstanding (excl. Lion Rock) to support the delisting. So if Giunti is independent then only another extra 2.3% of the shares would be needed.

      I can’t find in the circular if the Giunti’s stake is seen as part of the independent shareholders’ though.

      Then there’s the potential tender offer. The intended price is not announced in the press release that was published on the LSE, but it is in the circular: 150 pence per share. The price should have been included in the press release. I think it is very questionable to leave that out.

      Unfortunately there are a number of qualifications about the offer. The most important one is that they are not fully committing to the offer and the circular only talks about a possible offer. So there is a risk that there won’t be an offer and that you can be stuck with an unlisted stock without an active trading market (perhaps a matched bargain facility at best).

      If they do launch the tender offer, it will only be *after* the delisting. Can your broker accomodate a tender offer in a delisted stock? I’m not sure about mine and am waiting for a response from them.

      There’s also a risk that you’ll be prorated, because the potential tender is for slightly less than all of the remaining outstanding shares of the independent shareholders.

      It’s a complicated mess, isn’t it? This is not the way Quarto’s shareholders deserve to be treated. There were a lot of small shareholders that provided the company with fresh capital in the open offer a few years ago, when the company was in a tough spot. Even though Lion Rock and Giunti provided the bulk of the capital, I still think you have a moral responsibility towards minority shareholders in a case like this.

      Just make a fair offer in a traditional takeover. If they offered 170-180p in a traditional takeover, I think everyone would have been happy and Lion Rock and Giunti would still have gotten a good deal. But when you’re dealing with very greedy people that can make a few million more, and the listing rules provide no protection, this is the result. I thought better of Mr. Lau, but I was wrong to do so. Lion Rock minority shareholders at least have David Webb as a substantial major shareholder who will be looking critically at any transaction that might be tried there in the future.

  4. Hi

    I hadn’t seen the other circular – £1.5 is very underwhelming and I am a tad shocked that they can say below £1.6 with a straight face. My broker can hold unlisted shares but is not sure about the tender offer (they are still checking).

    With regards to the pro-rated part, my understanding is they would have to offer you fair value in order to do a squeeze out of remaining shareholders – if they are offering £1.5 in the tender offer it would be hard to go lower. Big problem here would be timing I think.

    I would also be more worried that they decide to delay the tender offer – I think that will cause pain. I think this classes as bad shareholder treatment – there is no commitment to anything and they want the minority shareholders to take all the risk.

    The Giunti point is interesting logically you would think there are definitely not independent but if they not then it does give you uncertainty about whether it will pass

  5. Quarto’s listing on the LSE has been cancelled today.

    They have also launched the tender offer. The documents can be found on Quarto’s website: https://www.quarto.com/aboutus/investornews.aspx

    The tender offer price remains at 150p, but they have increased the number of shares that can be purchased. Now all shares not owned by Lion Rock and Giunti can be purchased, so there’s no longer a risk of proration.

    A negative point is that the tender document mentions that, for non-US shareholders, the payment might be classified as a “dividend distribution” for US withholding purposes (page 8 of the document).

    There’s also a possibility that the payment will be treated as “proceeds of a sale or exchange” in which case there would generally be no withholding tax for a non-us holders.

    The document also explicitly mentions that, for non-US shareholders, a new Form W-8BEN must be submitted to the “Receiving Agent” (Link Group) and that previously submitted taxation forms will not be utilized in this offer.

    So that looks like it could be a headache. I definitely see potential for my broker to screw something up and contacting them is a nightmare. 🙁 I didn’t think that withholding taxes would be an issue for a tender offer, but apparently it can be.

  6. Interesting, I thought they would take their time to offer the tender offer. You were very quick to find it as well. It is interesting the problems that arise with special situations.

    I was briefly tempted to buy more shares ahead of the delisting but decided against it (it could have been a 10% return but not guaranteed and I didn’t want a bigger position anyway).

    You could hold out but I think they need 90% holding and I think that seems very achievable by them (84.7% voted for delisting).

    So it seems we are stuck with a headache. I think I will probably give the Receiving Agent a call next week, once I have read through the documents properly.

    Good luck!

  7. As feared, I’m having some issues with my broker about the potential withholding taxes for the tender offer. They claim that the W8 Treaty does not apply in my case because Quarto has its headquarters in the United States, but its listing was in the UK. They say that the W8 Treaty does not apply in this case, because the UK is no longer part of the European Economic Area (EEA). They say that in this case, withholding tax would be 30% for me.

    I disagree with this view and have told them that I see absolutely nothing in Quarto’s circular for the tender offer (https://www.quarto.com/public/pdf/investor/20240118_045501_Tender_Offer_Document.pdf .pdf) that says that Quarto’s UK listing would make me ineligible for claiming the lower treaty tax rates. I expect that there would be no withholding taxes in my situation if my broker correctly submits my W-8BEN and Form Section 302 (Option A for me).

    I think my broker might be confused about the situation and mixing up the requirements for form W-8BEN (for individuals which should apply to my case) and W-8BEN-E (entities). They referred to this link, which provides the W-8BEN-E instructions: https://www.irs.gov/instructions/iw8bene and provided this quote in their support ticket:

    “You may only check a box if the LOB article in that treaty includes a provision that corresponds to the checkbox on which you are relying to claim treaty benefits. A particular treaty might not include every type of test for which a checkbox is provided. For example, “Company that meets the derivative benefits test” is generally not available to a company resident in a treaty country that is not a member of the EU, EEA, or USMCA. In addition, each treaty LOB article that contains a specific test listed below may have particular requirements that must be met that differ from the requirements in another treaty with regard to the same test.

    Publicly-traded corporation—this test generally requires the corporation’s principal class of shares to be primarily and regularly traded on a recognized stock exchange in its country of residence, while other treaties may permit trading in either the United States or the treaty country, or in certain third countries if the primary place of management is the country of residence.”

    I think they are looking at the instructions for the wrong form (W-8BEN-E) and see nothing in the W-8BEN instructions that implies I would be ineligible for treaty benefits: https://www.irs.gov/instructions/iw8ben

    Am I missing something, and is my broker right after all? Or could I make any other arguments to them to help prove my case?

    If you have any ideas about this, I would like to hear them. I should add that I’m from the Netherlands, so perhaps that could change the situation as well, although I see nothing in the Circular that says so.

    My contact at my broker has now referred this to their Corporate Actions and Tax departments, so hopefully this still works out, but I’m quite worried at this point.

    • Hopefully someone else will respond – I am not a tax or financial advisor (all this is out of my circle of competence and the support quote is too technical for me).

      But I would say this, I believe the point of a W-8BEN is to declare that a double tax treaty applies and Netherlands, UK and USA all have double taxation agreements with each other. Logically you are a Netherlands tax resident, who is determining their US withholding tax liability (the UK part is irrelevant as they won’t charge you withholding tax, stamp duty, capital gains tax or income tax – it almost has nothing to do with them but some admin).

      Also its not a public company anymore and it is not listed in the UK.

      It would probably be worth talking to the Link Group – they will likely apply the US withholding tax and processing the forms – but you would likely need your broker on board to identify your beneficial interest and pay you properly.

      Also you need to use a W-8 form submitted after the offer date of 18/01/24.

      • Thanks, I appreciate your comment! Yeah, I would think your interpretation of the W8 issue is correct.

        I’ve had some more back and forth with my broker and they are adamant though that the W8 form is not valid here because of the (past) UK listing and the fact that the company’s headquarters are in the US. They do say now that I can ask them to submit the Form Section 302 on my behalf to reclaim the 30% withholding tax after the tender offer has closed. I think the broker has to submit the form(s) because it needs to be done at the level of the “Registered Shareholder”. My broker does seem to acknowledge that point now, so that’s a big step forward.

        So I think I’m just going to make that request to them after the tender closes and hope it goes well. Link Group won’t discuss the details of a particular tender offer, so I don’t think I can get anything useful from them.

        The tender offer results will be announced on Feb. 16, so we’ll only know the number of outstanding shares after the tender offer at that time. So I think the Form Section 302 can only be completed after Feb. 16, because it asks for the “Total Outstanding Shares of Issuer After Tender”. The deadline with Link Group to submit the forms is March 1.

        You can really see the difference between brokers with issues like this. The broker I have for this offer really doesn’t care if I lose 30% of my entire investment due to these withholding taxes. I have to constantly put pressure on them to even get them to respond. That answer is then far from complete and requires me to put pressure on them again.

        I hope the tender offer process is going smoother for you and the other Quarto shareholders! 🙂

        • Sounds a bit better but I would think you still need a W-8BEN to be submitted as well. I can’t believe that a past UK listing would be a problem – it sounds like they are making up there own logic – but I guess if they want to be difficult they can be.

  8. Did you see the results of the tender as at 13th Feb – only 894,326 have tendered there shares. Even Orbach hasn’t tendered… This is much lower than I expected (particularly given 34.6m shares voted for the delisting). It feels like maybe tending isn’t the only option after all.

    • Yes, that surprised me as well. I do think that a lot of brokers tender just before the deadline, so perhaps the final number of shares that are going to be tendered will be a lot higher.

      Personally, I do think that tendering is the best option for me. I also think that if you want to get exposure to Quarto, buying shares in Lion Rock Group (HKG:1127) is a great option. I own some shares of that as well. Lion Rock has other operations (printing), but IMO it is a well managed company and, like many companies in Hong Kong, is trading quite cheaply.

      An important bonus at Lion Rock is that you have David Webb as a fellow minority shareholder: https://di.hkex.com.hk/di/NSForm1.aspx?fn=IS20220331E00310. Webb is a critical observer and participant in the Hong Kong stock market: https://www.bloomberg.com/news/videos/2019-01-04/how-activist-webb-earned-20-a-year-investing-in-hong-kong-stocks-video. I think a great guy to have on your side if there’s any future low-ball take-private offer for Lion Rock itself.

      So I’d much rather own the publicly traded Lion Rock than the delisted Quarto. In fact, I screwed up last year by not selling Quarto at 170-180p and fully switching to Lion Rock when I had the opportunity to do so. I briefly thought about it but was too complacent. The delisting risk for Quarto was high.

  9. For those interested: my broker got back to me and asked me for a W8-BEN form! The bank that is processing the tender offer for them asked them for it. So it looks like Anonymous was right about that. 🙂

    Anyway, I submitted the form and think that will be sorted out now. They also said they will get back to me for the Section 302 Form after the tender offer completes. So I’m happy to say the tax situation looks a lot better now.

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