Friday, June 17, 2016

Exciting Times At Bracell

I wrote about Bracell 10 months ago as a potential value stock. What interested me was the oligopolistic industry in which Bracell was the low-cost operator. Temporary conditions of oversupply (which can last years) meant that Mr. Market had no interest in this company, which is where I like to come in.

Over the last few days, the company announced a surprise profit followed by an announcement that its majority shareholder was looking to take the company private. As a result, the shares have gone up about 100% in a week!

The stock still trades at a significant discount (30% or so) to book value, however. But I'm not sure what that's worth. The company's announcement made no mention of an offering price, leaving me wondering what I should do!

My understanding of the legal procedure is that (presumably, minority) shareholders in this situation (specifically, a scheme of arrangement under Section 99 of the Bermuda Companies Act) have to approve the sale by a 75% majority, and shareholders have no appraisal rights. But as I have limited experience investing in Hong Kong (this is the first company listed in Hong Kong that I've ever owned!), the additional cultural or procedural quirks are beyond me.

On the one hand, the controlling shareholder can get a good deal with no appraisal rights for shareholders. But on the other hand, the buyer needs 75% of sellers to get on board, so one would expect the offer would have to be pretty fair. And finally on the third hand (call me an economist, I guess!), the price has run-up so much so soon that sellers do have a lot to lose all of a sudden if they were to get too cute with the asking price.

I'm of course tempted to hedge: sell some now to lock-in gains, while risking some capital in a higher offer price. But there's probably a better way to go...I just don't know what it is myself. So to the Hong Kong/Bermuda experts, and the Bracell owners out there, along with all the armchair quarterbacks: what price would you expect the offer to come in at, and what should I do as a result?

Disclosure: Author has a long position in shares of 1768

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