"Do you see much appetite for Kov from PE or other public...

"Do you see much appetite for Kov from PE or other public companies (a la the allegro bid for CAA)?"

Interesting story:

In 2017 I received a wall-crossing call from someone representing a merchant bank who claimed to represent a then-undisclosed entity that was ostensibly looking to privatise the business (At the time the company was had an EV of a mere $20m, and Net Assets were close to $30m).

My guess at the time was that the plan - once in private hands - was to gear the balance sheet up a touch as well as sell-and-lease-back the land on which the factory is located, and in doing so pull out something like $10m of cash out of the company.

As it happened, the cumulative Free Cash Flow over the next 4 years amounted to a further $10m, meaning that - in that short space of time, the privatising consortium would today be free carried to the extent of the then-EV and that only whatever the consideration premium was, would be outstanding.

When asked if I would consider tendering my shares in such a privatisation proposal, my response was that not only would I not sell my shares into any privatisation exercise, but that I actually wanted to stump up my own capital to be part of the privatision exercise!

Curiously enough (or maybe not), I never heard from them again.

To this day, I'm nor sure of it was just a kite-flying exercise.


Anyway, fast forward to today: I think that a PE approach is not impossible, but it is not highly likely (I'd put it at 20% to 25% chance).

I think that one of the impediments to smart PE buying is the position of KOV's earnings cycle (we are clearly closer to the top than the bottom).

On the other hand, what has occurred to me over the years whenever I visit KOV's Kilburn factory, is the extent that the surrounding area is being upgraded and improved, bringing into question the long-term tenure there, of a business of Korvest's "heavy industry" operating nature.

So a move of the factory is going to have to happen at some stage over the next, say, two decades, in my view.

And the factory occupies a very substantial block of land located a little over 5km or 6km from the highly-sought after parks and streets of North Adelaide, where South Australia's most well-heeled are to be found taking their coffee, walking their dogs and riding their bicycles.

I'm sure that commercial or retail property developers with imaginations far more creative than mine would be able to turn that land occupied by Korvest to account in a highly value-accretive manner [*].

As recently as 5 years ago I would have said that a factory relocation would be a clearly NPV-negative exercise; however, given what the property market has done over the past decade, and how valuable land close to major Australian cities has become in recent years, I suspect we might have passed the tipping point where a relocation of the factory, in conjunction with the sale of the land, might be self-funding (and possibly result in more than just a few extra sheckels in the bank afterwards).

I suspect this dynamic of the rate of escalating real estate value exceeding the rate of increase in relocation costs would not be lost on PE investors who typically have long-term investment time frames.


[*] Let's imagine that Korvest site being developed into a world class medical research hub, incorporating state of the art diagnostic facilities such as pathology and radiology services.
And maybe also a biotech research hub, for stem cells and the like.

It's well within the realms of possibility.

.