Hi Guys,
A quick update from the ever rational and successful LT investor, James Cornell follows. He has once again updated his subscribers via email (outside of his paid service which I would recommend to people) and presents a good synopsis of the situation that is worth consideration.
Cheers
John
From James:
Here is an update on last week's update on the short selling attack on Quintis Ltd.
The current short interest statistic is 56,517,599 shares (13.9% of the issued capital). This is reported with a week's delay, so this is the number at the end of 24 March, the first week of Glaucus Research's attack. So short sellers collectively repurchased only 2,246,708 shares in that first week. That is only about 7% of the 32.5 million shares traded on 22-24 March.
A further 26.9 million shares traded on-market last week, with probably only a small percentage acquired by short sellers. This means that Glaucus and other short sellers still need to repurchase 50+ million shares on-market to eventually cover their short positions.
Quintis has responded to many of the allegations in the Glaucus initial report. This is now being called a “short biased opinion piece” by both parties. While statements made by Quintis need to comply with Australian laws “including compliance and governance requirements of the Corporations Act” and is monitored by ASIC and ASX, Glaucus “is not required to adhere to any of these rules”.
The Quintis Managing Director, Frank Wilson, has also resigned . . . not in disgrace or over any wrong doing . . . but to protect his investment in Quintis. Mr Wilson owns 48,860,285 Quintis shares or 13% of the company. As the major shareholder he has been approached by an “unnamed international corporation” interested in a “change of control transaction”. Free of his board responsibilities, Mr Wilson is “exploring this opportunity” with the corporation and “potentially, other third parties”.
“Mr Market” has reacted poorly to this news . . . perhaps assuming that Wilson will take advantage of the fall in the share price to acquire full ownership of the company and force out the public shareholders at a low price. But does Mr Wilson have the $355 million in cash (plus $70-150 million to offer a premium above market value) sitting in his bank account to fund a full takeover?
If an “international corporation” provides this equity financing then how does that benefit Mr Wilson? He will own 13% of a private company that owns Quintis instead of 13% of Quintis directly.
A debt-financed leveraged takeover would be an option . . . if Quintis was a mature, no-growth, cash generating business. A leveraged buyout is not appropriate for a growing business that requires additional capital for investment to expand its plantations and other businesses.
“Mr Market” may be dubious of Mr Wilson intentions, but we can not see how Mr Wilson can easily seek to benefit, at the expense of the public shareholders, from a potential “change of control transaction”.
On the other hand, a takeover offer (or even the potential of a takeover offer) is the perfect defence against a short selling attack. No trader wants to sell short or hold a short position if a takeover offer could raise the market value of the shares.
A “change of control transaction” need not mean a full takeover offer or scheme of arrangement where the public minority shareholders are forced to sell out.
Absolute control of a company requires just 50% of the capital, plus one additional share. Effective control can often be achieved with just 25-30% of the shares.
Summary and Recommendation
A potential takeover offer is a short seller's “perfect storm” - where everything goes wrong! For regular (i.e. long) shareholders this is a “virtuous circle” - where everything is perfect.
At some time over the next several weeks the short sellers must purchase more than 50 million Quintis shares to cover their short positions. At some time over the next several weeks an “international corporation” may also seek to purchase a large number of Quintis shares.
This is real and potential future buying of Quintis shares. Will existing Quintis shareholders continue to panic and sell? Perhaps, but almost 60 million shares (15% of the capital) have traded since the short selling attack. Logic suggests that many “weak” holders have already sold to “stronger” investors and that the volume of selling will return to more normal levels of 5-10 million shares per week.
This is a supply (i.e. low) and demand (i.e. high) imbalance that should result in the share price rising! Buy.
