Being listed isn’t always a gas
A listed company, for example on the Johannesburg Stock Exchange (JSE), allows its shares to be traded publicly on the exchange. This enables anyone to put in a bid for the shares which could match with an offer from an existing shareholder and…
…BINGO magic happens. Shares have been traded, there’s a new shareholder on the shareholder register and the seller walks away with cash.
What’s the point of this?
Well, from a company perspective, the major benefits of being listed include:
- Ability to raise capital by issuing new shares
- Acquisitions can be paid for by issuing shares to the sellers
- Brand prestige
- Credibility for customers and suppliers
- Staff can be incentivised with share options
Unfortunately, most of these benefits fall away when a company is a perennial underperformer or has limited liquidity.
Liquidity – what’s that?
Liquidity refers to the ease with which shares can be bought or sold. In a liquid market, there’s an abundance of willing buyers and sellers. At any point in time, a trade can match and a deal can be done.
In an illiquid market, there aren’t enough buyers or sellers. Sellers either can’t exit their positions without significantly dropping the offer price, or buyers can’t get in on the action without bidding higher. The former situation is more common.
Selling a house is usually a great way to experience an illiquid market. The seller has to wait weeks or even months to find a buyer and will usually be offered less than the asking price. In contrast, if you wanted to sell shares in a company like MTN for example, you could do it instantaneously.
No liquidity? No point.
If the company’s shares aren’t liquid, then it will struggle to find new investors willing to take illiquid shares, so raising capital is difficult. Sellers of assets won’t want to receive these shares either, so acquisitions in exchange for shares become a challenge.
Staff certainly won’t want to be given illiquid shares as part of remuneration packages, paying tax on something they can’t even sell.
Due to a lack of liquidity, the share price often trades sideways (i.e. doesn’t grow) and the company is valued at a low multiple. So much for the brand prestige benefit, then.
The only benefit that sticks is credibility, because a listed company must issue extensive (and expensive) integrated reports. Transparency and governance improve relationships with all stakeholders, but this comes at substantial cost.
Really, if there’s no liquidity, then being listed doesn’t make any sense.
Bye bye, Afrox
Industrial and welding gases business Afrox is the latest casualty on the JSE. Parent company Linde Group has made an offer to buy out the minority shareholders in the company. The company will continue to exist, but won’t be listed if the proposed deal goes ahead.
Afrox’s SENS announcement even notes the following:
“Due to Afrox’s low share liquidity, which deters potential investors, Linde is of the view that Afrox is more suited to an unlisted environment and that its continued listing provides little benefit to Afrox shareholders. Related hereto, the Linde offer will provide Afrox shareholders with a valuable liquidity event.”
Takeout offers are always at a premium to the 30 Day VWAP (the volume-weighted average price over the past 30 days). A volume-weighted price gives more weighting to the share price on days when lots of trades took place.
The offer premium is at a meaty 58.2% to the 30 Day VWAP, which represents an offer of R21.18 per share. The share price closed today at R23.90 per share, which I believe means that some speculators are hoping that Linde will have to revise the offer even higher to get the deal across the line. Either that, or people don’t read.
Interestingly, Linde only owns just over half of the shares in Afrox. That isn’t normally a recipe for low liquidity, but big chunks of the remaining shares are held by large institutional investors (like the PIC and Coronation).
This leaves only a small percentage of the shares as “free float” i.e. the shares that trade frequently among members of the public and small institutions. That’s why liquidity is low and why Linde no longer sees much point in the listing.
Those who bought in very recently will do well out of this, but longer-term shareholders in Afrox have endured a few painful years.
The pool is getting shallow
JSE investors have fewer companies to choose from every year. New listings are virtually non-existent and I’m confident that Afrox won’t be the last delisting that you’ll see in the next few months.
Thank goodness individual investors are allowed by the South African Reserve Bank to make global portfolio investments, tapping into offshore exchanges like the Nasdaq. This is subject to an annual limit (without special approval) of R1 million. Being able to breach that limit is what I like to refer to as a high-quality problem.