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Yellow Brick Road has released the details of the Mercantile OFM takeover offer, including what would happen to the company should it succeed.
Last month, the investment company offered Yellow Brick Road shareholders an off-market takeover bid to acquire all of the ordinary shares in the company for 0.09 cents, which YBR’s executive chairman, Mark Bouris, said was “unsolicited”, and in the view of the board of directors of YBR, “materially undervalues the existing and future value of the company and is opportunistic in its nature, timing and pricing”.
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The offer, made by Mercantile OFM (a wholly owned subsidiary of Mercantile Investment Company), is not subject to approval by YBR shareholders in a general meeting.
It would allow YBR shareholders to sell all of their YBR shares at a cash price that represents a 3.2 per cent discount to $0.094.
The group went on to claim that its directors have unanimously rejected the takeover bid, claiming that the offer is “grossly inadequate” and adding that Mercantile’s “inadequate and opportunistic takeover bid would deprive YBR shareholders of the full strategic value of their investment”.
Yellow Brick Road has now publicly released the full details of the offer.
Reason behind the takeover bid
According to the new documentation, the rationale behind the investment company’s offer comes down the fact that “Mercantile OFM and its associates are disappointed with the financial performance of YBR”.
“Mercantile OFM and its associates first acquired a relevant interest in YBR in November 2016, paying $0.145 per YBR share. Since then, the YBR share price has declined by 35.9 per cent,” the offer read.
“Mercantile OFM and its associates believe that such performance warrants Mercantile OFM making the offer and seeking greater influence regarding YBR’s strategy and operations. How Mercantile OFM might seek to exert this influence depends on its relevant interest in YBR following the offer and the outcome of [a] review.”
Its review would cover YBR’s strategy, operations, activities, assets and employees and “is expected to focus on matters which have not been publicly disclosed and any changes that may have been made since the publication of the 2017 Annual Report”.
The investment company said that as it does not currently have access to all “material information, facts and circumstances which it considers necessary to assess the operational, commercial, taxation and financial implications of its current intentions”, final decisions on what it intends to do with the company have not yet been made.
“Final decisions will only be reached in light of all material facts and circumstances,” it said.
What will happen to YBR?
Mercantile has said that should it acquire more than 90 per cent of YBR shares, it would seek to de-list the company, replace all non-executive members of the YBR board with nominees of Mercantile OFM (nominees have not yet been decided), undertake a review of the business, and — depending on the review outcomes — continue the employment of YBR employees.
Should Mercantile OFM acquire at least 50 per cent (but less than 90 per cent of YBR shares), YBR would become a controlled entity of Mercantile OFM and may be removed from the ASX. Again, under this scenario, the company would seek the appointment of a majority of Mercantile OFM nominees to the YBR board (although it has not made any decision as to who would be nominated for appointment) and seek to continue the employment of YBR employees (subject to its review).
It said that it would also potentially look to, “at some later time, acquire further YBR shares in a manner consistent with the Corporations Act”.
“If Mercantile OFM becomes entitled at some later time to exercise general compulsory acquisition rights,” it added.
Should the company acquire less than half of all YBR shares, Mercantile OFM said that it would “endeavour, to the extent possible through its non-controlling holding of YBR shares, to give effect to the intentions set out”.
However, Mercantile OFM said that it considers that its ability to effect its intentions would be “significantly limited if Mercantile OFM is unable to achieve a relevant interest in YBR of at least 50 per cent”.
In this final scenario, Mercantile OFM said that it may consider acquiring additional YBR shares under the “creep” provisions of the Corporations Act, which provides Mercantile OFM and its associates to acquire up to 3 per cent of YBR shares every six months until it achieves a majority voting power.
Shareholders “encouraged” to accept
The Mercantile offer “encouraged” shareholders to “accept the offer as soon as possible, noting, however, that the offer currently remains conditional”.
The offer is scheduled to close at 7pm (Sydney time) on 19 October 2018, unless extended or withdrawn.
The offer letter states: “If you do not accept the offer, you will continue to be exposed to the risks of being a YBR shareholder.
“Mercantile OFM considers that, while past performance is no guarantee of future returns, YBR’s historically poor financial and share price performance may indicate such performance may continue into the future without changes at YBR. YBR’s historical financial and share price performance has been poor. YBR has accumulated losses of $38.5 million as at 31 December 2017. The YBR share price has fallen by more than 84 per cent in the past five years.
“After the offer, there will be no certainty that YBR shareholders will be able to dispose of their YBR shares at the offer price.”
The investment company warned: “Depending on what level of acceptances Mercantile OFM receives, the market for your YBR shares may be more illiquid after the offer.”
