It’s been six weeks since long-suffering shareholders of KWV Holdings toasted proposals to uncork the rich asset values of the Paarl-based liquor company.

But this week shareholders perusing the circular outlining Vasari Global’s R1.1bn offer for KWV’s operating assets would have sobered up smartly.

The circular makes provision for any dissenting KWV shareholders to exercise their appraisal rights. What this means is that KWV would have to buy back the unlisted shares of dissenting shareholders at a fair value price. On paper, this might appear a non-issue. The fair price established by independent auditors KPMG for KWV’s operating assets is around R832m, or R13.47/share.

If the value of the so-called “heritage assets” that will be retained by KWV (after Vasari walks off with the operating assets) is added back, there would be an implied fair value of around R16.50/share.

This fair value is lower than Vasari’s offer of R16.91/share for the operating assets, and markedly lower than the implied value on KWV of nearly R20/share if the heritage assets — real estate and art works — are added back.

Why, then, would KWV shareholders want to dissent? It’s a case of a bird in the hand being worth more than two in the bush. Vasari’s offer stipulates a settlement of the purchase price in 36 monthly instalments. Understandably Vasari, no doubt fully aware of KWV’s uneven operating performances in the past decade, wants to be sure there are no nasty liabilities lurking. But the staggered payments realistically preclude KWV paying out a large special dividend any time soon.

KWV has only indicated that “no immediate plans exist for the application of the proceeds”. KWV is 57% controlled by Niveus, which in turn is 52% owned by investment house Hosken Consolidated Investments (HCI). One might reasonably also expect HCI/Niveus to consider buying out KWV minorities now that a reference value has been established by Vasari. Indeed, the leftover heritage assets, which include Laborie and La Concorde in Paarl, could slot into HCI’s property arm. But that’s not a foregone conclusion, and HCI/ Niveus could afford to let Vasari’s monthly cash settlements dribble into the old KWV shell on the premise that new investment opportunities were under consideration.

With this in mind, a fair value payout via the appraisal rights mechanism might seem like a clean, quick exit for KWV shareholders. But if a slew of minorities opt to exercise appraisal rights (which requires voting against the key resolutions) the Vasari offer could be scuppered as the deal needs approval of 75% of KWV’s shareholders.

My gut feel is that shareholders of long standing in KWV will probably support the Vasari transaction, even if there is a lack of clarity around how the underlying value will flow through to minorities. Blocking the deal would be disastrous. I have no doubt that if Vasari, which has made a generous pitch, was sent packing, then KWV’s over-the-counter shares would scuttle back to 600c.

Perhaps KWV could clarify its intentions for the Vasari cash. But it might suit HCI/Niveus if 10%-15% of KWV minorities took the appraisal route. This would bolster the stake HCI and Niveus have in KWV, which would be nice if the heritage assets proved far more valuable than initially thought.

Source: Financial Mail – MArc Hasenfuss