TUA - Turners Auctions. A Case Study.

[blackcap]

A lack of liquidity probably would mean a much more volatile share price. That fact is neither good nor bad. If you play things right as a TUA 'hold out', your eventual returns are likely to be much greater than those selling their TUA holding now. In the meantime you will enjoy a vastly superior dividend flow than those accepting Dorchester shares in exchange today, and IMO better capital growth as well.

I am presently more cashed up than I have been for a long time. I wouldn't hesitate to restore my shareholding level should the TUA share price show any sign of weakness post offer. With almost no downside likely, I would argue that those holding onto their TUA shares just as TUA embark on their new business direction are getting in on something big on the ground floor at a more than reasonable price. A rare and, almost worry free, privilege indeed.

SNOOPY

discl: Have retained half my TUA shareholding, and accepted DPC bonds for the other half.

Who is to say that TUA will remain listed? Or is that a requirement of the takeover? I am a bit fuzzy on my Company Law at present....

[Snoopy]

Who is to say that TUA will remain listed? Or is that a requirement of the takeover? I am a bit fuzzy on my Company Law at present....

If the owners of 10% or more of the shares on issue say no, then TUA will stay listed. If more than 90% of shares are accepted into the offer, then any 'hold out' shareholders can expect to have their shares compulsorily acquired by DPC.

My acceptance with 50% of my shares turning into DPC bonds was a hedge just in case TUA ends up being delisted. If I had not accepted for any of my shares and DPC had got to 90%, then I would have lost all interest in the company (TUA) because I would have been paid out in cash. The bonds are a much better deal than cash IMO.

SNOOPY

[blackcap]

If the owners of 10% or more of the shares on issue say no, then TUA will stay listed. If more than 90% of shares are accepted into the offer, then any 'hold out' shareholders can expect to have their shares compulsorily acquired by DPC.

My acceptance with 50% of my shares turning into DPC bonds was a hedge just in case TUA ends up being delisted. If I had not accepted for any of my shares and DPC had got to 90%, then I would have lost all interest in the company (TUA) because I would have been paid out in cash. The bonds are a much better deal than cash IMO.

SNOOPY

Thanks Snoopy, was no sure on the mechanics. I know what you mean about the 90% compulsory acquisition rules and subsequently sections 110-111 of the companies Act that you can also rely on as a minority shareholder. Agree with you too that the bonds are a much better deal than cash. But.... what guarantee do TUA shareholders have (lets say DPC get 85%) that the board of TUA will not at some stage in the future "de-list" TUA to cut costs... (at the behest of DPC off course who will then dominate the board) Ie you 15% are still TUA shareholders with the dividend stream accruing to TUA but your shares are not trade-able, or mabye on some secondary market.... That would be my concern.

[Snoopy]

But.... what guarantee do TUA shareholders have (lets say DPC get 85%) that the board of TUA will not at some stage in the future "de-list" TUA to cut costs... (at the behest of DPC of course who will then dominate the board) Ie you 15% are still TUA shareholders with the dividend stream accruing to TUA but your shares are not trade-able, or maybe on some secondary market.... That would be my concern.

The subsequent way to delist TUA, if DPC wanted to do that, would be to mount another takeover offer on more favourable terms. The new takeover terms would have to be more favourable to dislodge minority shareholders who considered the current offer was not good enough. This is what has just happened with another share with a small minority shareholder base, Lyttelton, Port of Christchurch.

I would say, eventually, a higher bid and subsequent delisting of TUA is likely. Another possibility is that DPC sells down some of their holding of TUA shares, still maintaining 51% control. That would be another way for DPC to raise cash for the rest of its business empire, without endlessly creating more DPC shares. IMO this is less likely, but still possible.

As for some behind the scene deals to treat some TUA shareholders (DPC) more favourably than others, I don't believe this is possible under NZX main board rules. Dorchester, I believe, would not be able to vote on a resolution to move TUA to the Unlisted board for example. And it would be likely than remaining minority shareholders would vote down such a motion.

SNOOPY

[Snoopy]

Maybe .... if fundamentals remain positive, if not and you choose to exit, you may have to accept a significant discount. I always like to have a clear way out.

Your concern about a deterioration in business conditions and the lack of an easy way to exit is legitimate Black Knat. To some extent I have been facing this situation with TUA for the last few years already. If your own shareholding would add say, 10% to the volume of shares traded on an average trading day when you sold it, it is likely your shares could 'move the market' if you sold them, relegating any quoted market price you might have got to the theoretical.

Every share has its own characteristics. But I rationalised holding TUA under such circumstances myself like this:

1/ TUA is a clear market leader, the dominant player in vehicle auctions in NZ, and outside of Auckland, really the only game in town. It is highly unlikely a competitor will be able to gain market share quickly.
2/ TUA has an historical record of being a high return on equity, conservatively geared business who have learned to 'stick to their knitting'.
2/ TUA is possibly on course to become the clear market leader in second hand vehicle sales in general. The market is still fragmented. But there is a big growth opportunity out there for the Turner's Fleet side of the business.
3/ The high dividend policy of TUA of the last few years means that over the last few years shareholders have been recovering some 10% of their investment capital every year just via dividends. So the problem in reality is keeping up your stake in the business, not selling out.

In summary the business fundamentals are so strong, and the returns so high that, IMO the risk of not being able to sell out quickly is well outweighed by the risk of not being able to invest in the business in the first place due to lack of liquidity. Furthermore, unlike some highly successful NZX listed business, TUA is IMO not in any way overpriced in terms of fundamentals, even at the takeover price of $3. I do expect some dip in the share price once the takeover offer closes. But I would expect it to be up to $3 again within a year if CEO Todd Hunter's business plan execution is successful.

SNOOPY

[bunter]

What if DPC start charging TUA steep management fees?

[noodles]

I reckon they will extend the acceptance date and scaremonger holders into accepting.

As I predicted...
"In order to enable further Turners’ shareholders to accept the offer, Dorchester has varied the offer by extending the closing date for the offer until 11:59pm on 7 November 2014. Dorchester has elected not to vary the date by which the offer is to become unconditional of 3 November 2014, and intends to declare the offer unconditional before 30 October."

https://www.nzx.com/companies/TUA/announcements/256554

No scaremongering yet.

[Snoopy]

What if DPC start charging TUA steep management fees?

TUA are fully self contained. They won't need any management from Dorchester. However, in the unlikely case of DPC pulling a management fee trick, I will recover my cash via the Dorchester bonds I swapped for half my TUA shares. It's called hedging for all eventualities.

SNOOPY

[noodles]

TUA are fully self contained. They won't need any management from Dorchester. However, in the unlikely case of DPC pulling a management fee trick, I will recover my cash via the Dorchester bonds I swapped for half my TUA shares. It's called hedging for all eventualities.

SNOOPY

I'm not sure you have quite thought that one through. DPC is much bigger than TUA (from a profit perspective). If DPC strip the profit out of the finance and insurance part of the TUA business, all that is left is the auction and retail.You will see profit halve.

But for DPC, their profit will only increase by about 15%

So I would argue if TUA profits fall by half, their share price will fall by half.
If DPC profit increase by 15%, their share price will increase by 15%

So what are you left with? A net loss of 35%?

[noodles]

I'm not sure you have quite thought that one through. DPC is much bigger than TUA (from a profit perspective). If DPC strip the profit out of the finance and insurance part of the TUA business, all that is left is the auction and retail.You will see profit halve.

But for DPC, their profit will only increase by about 15%

So I would argue if TUA profits fall by half, their share price will fall by half.
If DPC profit increase by 15%, their share price will increase by 15%

So what are you left with? A net loss of 35%?

But lets face it, it is a bit of a pointless debate. They are going to make 90%