National
Wake up and smell the coffee, it's more than lushus
By Marston Gordon
Sep 9, 2007, 21:03

The Mandatory Offer for Salada Foods Jamaica Limited by Three Bears Ltd (TBL) on August 13, 2007 was long in the making and a welcome development for investors in all publicly traded companies on the Jamaica Stock Exchange (JSE).

Model investor

Donovan Lewis of the Ideal Group is a patient and experienced investor. He has been at the table for some time and has lost a few rounds: investment in KIW (1980s) and significant value in Island Life (1990s). Even after that, he has had to fight tooth-and-nail to defeat the offer by First Caribbean Jamaica Ltd (formerly CIBC Jamaica) to its minority shareholders and complained bitterly about the dilution suffered when First Caribbean International was solely permitted to inject additional capital.

Taken in context, this is not the kind of person that would make a serious offer for a company at a discount to the market price. And with that said, we can take him at his word that it is not his intention to de-list Salada and if warranted shares will be resold in the market to limit his holding to less than 80%.

Berry out of season

Donovan has been accumulating shares in Salada for almost 15 years and prior to the acquisition of the holding from TBL and Caribbean Investment Fund (CIF) which took him to 60%, he held almost 2.0 million shares or 20% of the company.

It is therefore a puzzle as to why Mayberry has thrown its hat into the bid ring. They have little or no shares from which to benefit if the thought was for Donovan to increase the offer price and he has already stated that he has no interest in acquiring any more shares.

It is reasonable to conclude that Mayberry in not serious in its bid for 51% of the company at $32.50. The next two largest blocks account for 27% of the outstanding shares and have not changed hands in at least a dozen years. In fact, the bigger of the two has held it’s 18% stake prior to the acquisition by TBL from JSE PLC over 10 years ago. The other block of 899,000 shares (9%) is held by Donovan’s friend Mr. NCB himself. And even if all the other shareholders tender to Mayberry’s offer, which is highly unlikely, only 13% of the outstanding shares would to available for sale.

Ideal price

The mandatory offer by TBL at $25.82 per share is consistent with the price paid by Donovan to acquire Salada shares from TBL and CIF and is close to the weighted average closing price of $25.74 that the stock traded in 2006 and just shy of its net book value of $24.45. It is a good price to all parties involved as I reckon that each vendor paid approximately $6.50 per share around 10 years ago, yielding an average return of 30% per year. As at Q3’07 Salada reported cash per share of $12.57 almost half the price that Donovan has paid.   

Something brewing

Donovan was quoted in the Jamaica Gleaner of September 5, 2007 as saying that he would not recommend existing shareholders to sell their shares below the current market price of $45, not even to him. This is not any act of benevolence it is mere shrewdness.

Salada is converting cash at an enviable rate from each dollar of earning and its new owner will not make the same mistake of not rewarding its shareholders as the former majority did. With 2007 earning per share (eps) set to top $5.00 of which interest income will account for $1.30 of earnings, the company can comfortably afford to declare $1.00 dividend without disturbing its cash from operation.

The million dollars question is why would Donovan not go for the whole hog. Simply because the tax treatment on dividend is more beneficial to shareholders of publicly traded companies than private entities, it is taxed in the case of the latter.

It is my suspicion that the Lee Chin tactic will be deployed with regard to the use of dividend to recoup investment. The price of the stock should respond positively and move beyond its 52 weeks high of $65.00.

Source: Jamaica Stock Exchange, Jamaica Gleaner and Jamaica Observer