Takeover offer for Legend Corporation by Adamantem

There have been some developments at a couple of my Australian holdings recently. The most important is the takeover offer for Legend Corporation (ASX:LGD) that was announced last week. A link to the filing of the cash offer can be found here. I wrote a post about Legend two years ago for VIB premium (which is now closed). Legend was, and still is, a large position in my portfolio.

Private equity firm Adamantem Capital is offering $0.365 per share in cash. Legend can also declare a special dividend of up to $0.07 per share which would be subtracted from the cash consideration. The special dividend would have up to $0.03 franking credits attached which could have tax benefits for Australian shareholders. The acquisition will take place by a Scheme of Arrangement.

The Legend directors support the offer and recommend that shareholders vote in favor, “in the absence of a superior proposal”. Perhaps there is room for another bidder to come in with a better offer. If not, I think this offer will probably be approved. Legend’s CEO, Brad Dowe, owns about 30% of the shares and supports the offer and another large shareholder (16% of the shares) will support it as well, subject to there being no superior proposal.

I was a bit disappointed with the offer. At $0.365 and 216.7m shares outstanding, it values the company at around $79m. Legend earned $6.0m in fisc. 2018, but reported very strong earnings of $4.06m for H1 of fisc. 2019. Their outlook was for continued growth for the rest of the year. On top of that, the earnings numbers for Legend have for several years been a bit understated. The company had amortization charges ($0.96m in 2018) that were not real economic expenses affecting the true “owner earnings” of the business. So Adamantem is probably buying the company for less than 9x earnings. That doesn’t seem high to me. You hear people like Buffett complaining about the crazy prizes that private equity buyers are paying nowadays. Well, not here it seems.

Or perhaps Legend is simply not as cheap as I thought. In my write-up I mentioned that there might be some impact to the business if Australia’s housing market cools down. Well, that cooldown is now happening. I have no good idea how this will impact the overall economy and the company specifically. Legend was still positive about the short-term business outlook at the end of February, but it could be that the business is more cyclical than I thought.

Another reason that Adamantem might not pay full value here is that they plan to put in another CEO after the deal closes. Perhaps this is because Mr. Dowe has indicated that he wants to retire. I think Dowe has run the company well and that he has proven to be a good capital allocator. Him not staying on board after the closing probably makes the deal less attractive to a buyer. A buyer will probably take this into account and will use this argument in a negotiation. With Dowe in place you know what you get and it has proven to work. By bringing in a new CEO you also introduce some uncertainty. It’s usually better to just keep doing something that works.

According to this page, Dowe is 58 years old. The company has been performing a “strategic review” for a couple of years. It could be that Dowe just wants to cash out and retire. Does he really care that much if he doesn’t get the last 15-20% out of this sale? Maybe not if the alternative is postponing his retirement and working hard for several more years in order to get a better offer. A buyer can get the better deal in a sale negotiation if the seller is thinking along these lines.

From what I understand, the scheme has to be approved by 50%+ of the number of shareholders that are present at the court meeting (“headcount test”) and by 75% of the votes cast. I know there are a couple of large shareholders that are not happy with the offer. Perhaps their influence could lead Adamantem to increase their offer a bit. There’s also the possibility that another buyer emerges. For now, I think I’ll hold my shares and see what happens.

Disclosure: long Legend Corporation