discmans point of view:In last 2 weeks, MFS had managed to...

discmans point of view:
In last 2 weeks, MFS had managed to create its own recipe of disaster.
It was back to 2 weeks ago, when MFS announced it had made a specific proposal to Centro, for a potential role of becoming the independent manager of about 35 unlisted closed-end Centro property syndicates. From MFS perspective, it just tried to put a finger on this CNP sinking ship, and see what possible profit opportunities here. MFS was actually playing safe, as it didn’t touch any Centro’s real estate (which could potentially link to debt). However, MFS didn’t realise the market would punish any one who associated with CNP at this time. So MFS share price dropped almost 20% in that week. The worst thing is, the market started linking the name MFS and CNP together.

MFS share had been rated as undervalued for a while, some stockbrokers valued the business at $5~6 per share, and even City Pacific seen the value of the business and wanted to offer the Merger proposal last week. There are lots of investors who bought the share with margin loans (including the director), as most of the value/fundamental investors do, they were looking for good return in long term.
This is no secret for the hedging funds and shorters. Shorting on an undervalued company is high risk business, you won’t know when will the big players jump in and support the share, causes it instant bounce back. But when fear is dominated the share market, the credit market is so squeezed that all big players had tighten up their money, then you got all perfect ingredients ready, and shorting become a easy thing. Now they just wait for the right moment to come.

On last Friday, The poor CEO Mr King announced his long intension of splitting the Stella and Financial Services in to 2 standalone entities. Normally, it was nothing wrong, especially from a high level management perspective, as these 2 businesses have very different in nature, the split would allow better management and provide clearer financial structure to the public. But Mr King did it with $550M recapitalisation and the words “reduce indebtedness” in the one page statement, that had turned every around. The market hates the word “debt” and with only one page statement, there is lots of “unknown” regards to financial situation. When the trade open, the sensitive Investors started to dump the shares, then the hedging funds and shorters seen this golden opportunity came. They just need little effort to push the price further down to the point that would trigger margin calls. They had done very good job at this time, the Margin lenders were extremely busy forcing investors to cover calls on their positions, but who would had the sperate money for the share market in these days, and most importantly willing to put into a company called “next CNP” in all major newspapers and web sites? So you got millions of shares were forced to sell in just couple of hours. There was more, the computer at Barcalys – (one of MFS major shareholders) was issuing sell signal. Some of you may not know, Barcalys runs quant-style funds – that is, with a computer rather than a human deciding when to buy and sell. In result, 10.5 million MFS shares were sold (that is 2 per cent of the company). Then follow by small investors, who were scared, and joined the selling force. At the end of the day, the share price closed at $0.99, that is 69% down in single day.

During the weekend, most of the newspapers and web sites had reported this disaster. The articles change tone from “company with debt concerns” to “company with serious debt problem”. Some articles almost certain that “MFS raises 550 million dollars through a rights issue to fund short-term debt.” Every single one of them are linked the company with the CNP. These are just worst confusions compare to the company announcement. The poor CEO Mr King almost had to “swear to god” to declare that company doesn’t have any hiding debt problems, and MFS has no difficulty in either repaying or refinancing the $150M debt which due in March.

Monday, the company had an expected trading halt, followed by CEO resigned which just tried to comfort the anger investors. Mr King is the founder of the company, he is not one of those come and go CEO. He is also the company's third-largest shareholder and hold over 32M shares. I haven’t seen any reports that he had dumped any shares so far. (He kept buying back share till Nov last year) He was willing to foregone his right to be paid compensation and entitlements. After all if you are the third-largest shareholder, the company’s best interest alias with yours. (Personally I do respect this kind of CEO - not only the founder but also have large commitment to the company.)

Later on, City Pacific confirmed the withdrawal of the original merger proposal. That is very reasonable move, can’t argue with that. What rather surprise me was HFA and Flight Centre had to make a public announcement to draw a clear line between them and MFS. So I think, if you are a CEO and you don’t want to resign soon, then you wouldn’t want your company name links with MFS then CNP on newspapers in any circumstances.

Now will the company share price come back up in short term? Only God knows ! You have the entire share market free falling today, the big banks and brokers reported $15B lost in one quarter. Margin calls are flooded into share holders’ houses. US recession looks like start kicking in, Fear fills in every investors hearts, and lots of hedging funds and shorter are aiming on the back …… This is the worst time in share market you could possibly get.
On the other hand the company problems are not just performance or financial figures on balance sheet, but rather “shareholder trust”, “uncertainty to the true intension behind the proposal”, “fear to be next CNP”, “possible hiding debts”, "doubt to the management” there are some thing you can not calculate.

Just let you know my position, I bough some shares around $1 on Friday, As an value investor, I do think MFS is in very very good value, unless I had been fooled by all its financial reports in last couple of years, or the CEO is willing to go to jail by hiding half billions short-term $ debt from the public….
I don’t except the share come back up soon, but in long term, it may turn into gold.
Don’t count my words on your investment, do you own research … Or if you have different views, welcome to reply…