Bidding for the “takeover of the year” award
The announcement by SFS Group Public Co. that it intends to file a takeover bid to acquire a minimum 20% and up to 100% of the share capital of CyVenture Capital (EXE) got little attention in the market.
The reason could be that the deal is more favoured towards SFS shareholders and that it may be described as the “takeover of the year” in terms of the smart way that it has been tailored.
SFS says it directly and indirectly controls 43.61% of the share capital of CyVenture, including the interests of directors and associate companies. SFS is offering 2.5 of its shares (new issue) for every 1 EXE share to lift its stake either above 50% or even reach 100%.
SFS Vice Chairman Philip Larkos told the Financial Mirror that the direct stake of SFS in EXE amounts to 28% while its subsidiary White Knight Holdings (WKH) controls a further 7%, raising the total direct stake to 35%.
Based on the 13.627.087 outstanding shares of CyVenture, SFS will need to issue 22.144.015 new shares to raise its stake in EXE to 100% from the current 35%. Based on the latest 7 cents CSE price of SFS, the value of the 22.14 mln new shares amounts to CYP 1.55 mln.
Rich Assets
The issue of about 22.14 mln shares will lead to a 8.5% dilution in the interest of SFS shareholders based on the 260.42 mln outstanding SFS shares.
Although CyVenture is a loss making company — in the first half of 2005 it lost another CYP 97.000 on top of CYP 2.4 mln losses in 2002, CYP 579.000 losses in 2003 and CYP 1.8 mln losses in 2004 —
SFS will lay its hands on up to CYP 3.7 mln in assets and practically no debt.
As per the June 2005 results, CyVenture had investments of CYP 859.000 in real estate, CYP 585.000 in cash, CYP 291.000 in Helic S.A. and MediaBox, a further CYP 649.903 in A. Phillis Holdings and CYP 477.673 worth of investments of which CYP 95.000 are CSE listed.
Larkos added that Franston Ltd., which earlier was taken over by SFS has repaid overdue balances to CyVenture amounting to CYP 755.675, which leads the Financial Mirror to conclude that the cash balances of CyVenture may now amount to CYP 1.34 mln.
At a discount
According to the nine month results released by SFS, the book value of the company as at September 30, 2005 amounted to 9.1c while as at end June, the book value of EXE amounted to 27c.
Taking the 2.5 times offer ratio into consideration, it is clear that the SFS bid values EXE at 22.5c per share (9.1 SFS value x 2.5 times), or at a 15% discount to the book value of CyVenture.
Larkos defends the discount saying that is due to the low marketability of the shares of EXE, which are seldom traded, compared to the high velocity of the SFS shares.
“For the price of getting out of a low marketability stock and into a high volume stock, we believe the 15% discount is justified,” he said.
Too good for SFS
Larkos says in the event that the takeover rate reaches 100% and EXE is delisted from the CSE, then the immediate cost savings will range between CYP 50.000 to CYP 100.000 annually in terms of listing, auditor, supervision and other related expenses.
He also insists that the legal issues against CyVenture amounting to CYP 850.000 and stated in the accounts will not affect SFS in future, considering that EXE will remain a separate legal entity.
Larkos dismissed our view that there is a connection between SFS, Franston, CyVenture and White Knight. He admitted that Franston had purchased 9.7 mln WKH shares for CYP 1.26 mln or 13c a share from CyVenture but had agreed to settle the amount in installments. The third and final installment due end of November was settled on November 11 in order not to give rise to allegations of related party dealings.
On April 13, 2005, SFS announced the 100% takeover of Franston for CYP 825.000, of which CYP 310.000 was goodwill. The official explanation was that as Franston held 26.813.124 WKH shares or 12.4% of its capital of WKH but owed money to others, SFS considered it prudent to acquire the company.
By offering the equivalent of CYP 1.5 mln in SFS shares (paper in reality), SFS is now attempting to get its hands on CYP 3.7 mln of EXE assets of which as much as CYP 1.3 mln may be in cash and close the Franston dealings with CyVenture.
Having made repeated impairment in value of its investments, especially on its holdings in Helic S.A., Media Box and A. Phillis Holdings in previous years, there is a good chance that from now on, there will be no negative hits and in the worst scenario, CyVenture breaks even.
So, SFS gets its hands on CYP 3.7 mln assets, no potential losses and only a small dilution in its shareholder interest and if any one of the CyVenture investments start yielding profits, then that will go into the profits of SFS. For SFS shareholders, it can only get better.
