Investors Mutual Limited (IML) accepting the revised $0.84 offer...

Investors Mutual Limited (IML) accepting the revised $0.84 offer price was a surprise to me when it was initially announced on 11 December 2023. Since then, I have been trying to understand their justifications for accepting the offer.

Unfortunately, we're not privy to the conversations that took place with IML to convince them to accept the revised offer, but I have some suspicions. IML has been a long-term public supporter of the business. They initially refused to comment on the original offer back in September 2023 but were subsequently vocal about the offer considerably undervaluing the company.

Pact was one of Simon Conn’s (Senior Portfolio Manager - IML Mid & Small Caps) “3 favourite small caps for 2022 and beyond” (article dated March 29, 2022) when the share price was approximately $2.25. Since then, Pact has continued to invest significantly in the business and is arguably now much better positioned for future positive cash flows. Based on IML accepting the revised offer, they have realised considerable losses, and their decision reflects poorly on their overall investment conviction, philosophy, and integrity.

Based on recent trading, IML would have likely had the opportunity to sell their holdings to another fund at a higher price. Alternatively, they could have worked with other parties to increase their joint ownership, therefore preventing any possibility of compulsory acquisition. I also confirm that IML never attempted to reach out to me as one of the larger shareholders of Pact to discuss such a strategy.

RG’s relationship with IML is longstanding based on IML’s investments in Pact, Pro-Pac Packaging (PPG), McPherson’s (which RG previously failed to take over), and other financial relationships. RG needed IML’s agreement as part of the revised offer since RG and his team have been using that as a scare tactic in practically all of their written and verbal communications, including their Bidder’s Statements, emails, phone calls, and news articles. I’m convinced that if it were not for IML accepting the offer, the overall acceptance (outside of IML’s ownership) would have been considerably less.

For those who may not be aware, IML also has approximately 13% ownership (enough to prevent compulsory acquisition) in PPG, and RG owns approximately 66%. It is a very tight registry with minimal liquidity, and the top 20 shareholders own roughly 90% of the shares on issue. Simon Conn was one of the very limited number of shareholders who attended the AGM in person on November 21, 2023, which was less than three weeks before the revised offer to acquire Pact.

Simon asked some direct (and justified) questions regarding the future of PPG’s Board, and IML’s dissatisfaction was also evident based on the Results of the Meeting. I can’t help but assume that any discussions that took place between IML and RG regarding the acquisition of Pact also included future plans for PPG.

Pact is a higher quality business, but PPG is a turnaround in progress and has recently been increasing its focus on investing in the circular economy. Circular Plastics Australia (LDPE) Pty Ltd was incorporated on June 1, 2023, as a joint venture between Pact, Cleanaway, and PPG, with equal shareholding of 33.33%, and RG is the owner and developer of the planned soft plastic film recycling plant.

I believe that PPG’s future as a listed company will be highly dependent on how RG’s acquisition of Pact plays out, and how that benefits IML will be interesting to monitor. For complete transparency, I am also a PPG holder, although my exposure is considerably less than my investment in Pact.