Dealing with delistings

We are seeing a spate of small- and mid-cap stocks delisting, or at least announcing intentions to delist. 

These include Clover, Verimark and Howden Africa. 

In all three cases, at the time of writing (22 October), the companies had issued Sens announcements to that effect, but no details in terms of prices at which the delistings would happen.

What this tells us is that there are some really decent quality small- and mid-cap stocks trading at cheap valuations. 

These cheap and quality stocks are certainly known, and the delisting surge is not unexpected. 

And I think we will see a lot more delistings coming our way.

In reality, this is how a stock market works. 

When quality is cheap, we as investors are buyers. The difference with delistings is that the buyers want the entire company and plan to take it off the JSE to be privately held. 

What this trend also indicates is that we are likely close to a bottom in the small- and mid-cap space. 

But this statement comes with a caveat: “Close to a bottom” does not mean we are at the bottom. And just because we are at, or close to, a bottom, does not mean the sector will start roaring higher any time soon. 

I have written before that, typically, large stocks run higher and when their valuations get really stretched, investors start looking at small- and mid-cap stocks, eventually sending their prices higher.

For investors in the small- and mid-cap universe, this spate of delistings is not good news as it forces us out of some quality stocks at discounted valuations, and reduces the size of the investable universe. 

In time we will start to see a listing boom again, but this typically happens when overall valuations are stretched as the sellers (who are listing the stocks) get better prices.

The process of delisting

With a delisting, there is a process that has to be followed and that starts with the initial cautionary. 

Companies then need to announce the proposed price at which the delisting will happen and then shareholders will get to vote.

Importantly, the proposed price will be linked to the share price in the month or three before the announcement. 

Net asset value will have no bearing on the delisting price.

The process requires an independent board to consider if the proposal is fair – most often this independent board does just that.
Existing shareholders are then able to vote on the proposed delisting. 

If enough vote against the proposal, the delisting is either void or needs court approval, depending on the percentage of shareholders who voted against the deal.

Most often the delisting gets the required votes, especially as the price of the delisting is usually at a premium to the existing share price before the announcement. 

So shareholders are able to make a quick 20% or so, albeit the longer term potential profits may have been much greater.

Assuming the vote passes, shareholders will then be paid out into their trading accounts with details of the relevant dates being announced on Sens.

Keeping the back door open?

Sometimes shareholders are offered the option to remain invested in the company as an unlisted entity. 

I always reject this option. Unlisted shares are extremely illiquid, with no real price discovery. 

They are almost impossible to sell (unless at bargain basement prices). 
Furthermore, being listed adds an extra layer of protection thanks to the JSE listing requirements. 

So even if offered the option to remain invested, I would take the money.

Therefore, while this spate of delistings might be no fun for investors – as it reduces our universe of quality and forces us out of some gems if the vote is passed – you are entitled to vote. 

So, share your view by voting. 

This article originally appeared in the 8 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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