The MMC Contrarian (MMA.AX) share buy back is a puzzling affair, full of intrigue and board/back room agreements. Or so I assume, as the buy back initiation booklet does not honestly explain why MMC is implementing the buy back or what the advantages to long term holders are. As Guinness Peat Group (GPGA) will continue to be a holder I assume there are some advantages, I am simply bewildered why they are not being made publicly available. MMA plan on paying $200,000 in costs to buy $75M in shares at above market value so they can decrease the earnings per share, how on earth can that be a sensible allocation of capital?

Let’s examine what the buy back document states.

1.2 Why is the Company Implementing a Share Buy Back?

• return excess capital to shareholders
• present an opportunity to Shareholders who want to realise a portion of their investment at its NTA amount.

Point one appears to be an excuse. I imagine the thinking in the board room went like this. We want to do the buy back and we don’t want to tell our smaller shareholder the real reasons. What excuse is in the company constitution? I know, a return of excess capital.

Then the lawyers or perhaps a board member with morals spoke up and said come on guys we have to indicate one of the real reasons for doing this. So they added in opportunity to sell at above market rates for the before tax NTA.

1.7 What are the advantages of the Buy Back?

(a) it permits the company to efficiently return excess capital…at its NTA, which is greater than the recent market price.

While that may be an advantage to the substantial shareholder HGL Limited (HGL) who wishes to sell all their shares, it appears to be a disadvantage to long term holders as they pay above market rates.

(b) it results in a more efficient and appropriate capital structure for the Company’s strategy.

In these volatile times cash in king. Throwing your money away at above market rates does not appear to be the best strategy at what will surely in retrospect be the best bargain shopping time of a generation.

(c) all eligible shareholders have an equal opportunity to participate

Is that an advantage? No, it’s simply a statement of fact. No advantage there.

(d) it should allow the Company to Buy Back a greater number of Shares within a shorter period than under an on-market Buy Back.

There seems to be a grain of truth in that one, so let’s look more closely. First let’s look at the usual discount to NTA and trading volumes.


The shares have traded for around 18-21% discount to NTA. So if the company started to buy back shares on the open market they have a large margin to NTA within which to operate. It is highly unlikely that the average price they would pay would be equal to NTA. It also appears that HGL is a motivated seller. A motivated seller with a large holding would see the gap to NTA widen further as they sold down their holding. Existing shareholders would benefit from this as the company bought the shares at a large discount. So why would MMA decide to forgo this opportunity to increase shareholder value?
Looking at the recent volume it would take a while for MMA to buy back 100 million shares. Heck, they’d be forced to use dollar cost averaging while obtaining a discount to NTA to benefit existing shareholders.

Perhaps it is GPGA who are obtaining the benefit of buying more shares at a faster rate while still obtaining a discount to NTA.

(e) it should enable Shareholders to sell a large volume of Shares without depressing the market price of Shares

As per above, any long term holders should be happy to see the market price of shares become depressed and the discount to NTA widening. This allows them or the company to further enhance future profits. Like each point so far this is only an advantage to those who want to sell, like HGL. Perhaps of no coincidence is the fact that the MMC Chairman, Kevin Eley, is also the CEO of HGL.

(f) Shareholders should not have to pay brokerage…to sell.

For most that is insignificant. For HGL and GPGA it is a massive saving on brokerage costs as MMA pays all the associated costs. Yet another in a long list of disadvantages for long term holders.

(g) Shareholders can choose whether they want to participate or not.

They are having a laugh. Did the directors say we MUST have seven advantages, even if the seventh is exactly the same as the third. This is a simplified rewording of C.

In summary the listed advantages are clearly focused on sellers. There is no open or honest discussion of why MMA are doing the buy back and the disadvantages are not even discussed. They board and executives seem to lack respect for small long term shareholders who wish to remain committed to the company.

The bottom line is the earnings per share will actually fall after the buy back. That’s right each share you own will actually earn less. I reiterate MMA plan on paying $200,000 in costs to buy shares above market value, how on earth can that be a sensible allocation of capital?

My Questions

• What are the advantages to long term holders? As GPGA appear to be in on the deal they clearly see advantages.
• Why are shareholders not being informed of the advantages of remaining a shareholder?
• Why is the company so keen to see this buy back motion approved? So keen they have squandered money on a telephone campaign to elicit shareholder approval.
• Is the buy back simply a means to pay HGL above market rates for their shares, while providing GPGA a means to buy at a substantial discount to NTA?
• What other information that should be disclosed is not being made publicly available?
• Why has MMC arranged a buy back which appears to benefit its Chairman, Kevin Eley, and GPGA more than committed shareholders? GPGA is getting a discount of 12.66% on HGL’s shareholding.

Until the company treats shareholders with respect and honesty I will be voting no to the buy back.

[Update: In fairness to the company, the original announcement made to the exchange and linked below is more open and honest. However, the majority of shareholders do not read such announcements and rely on the information sent by the company. In this case that is the Invitation Booklet and pertinent information has been excluded from that document.

Some possible advantages

• Hidden in the definitions and interpretations I note the NTA amount has some possible advantages. The amount offered is before tax. As of August there was an additional 3.4 cent tax benefit within the company. Those selling forfeit that amount.
• GPGA is a proven performer and it will be good to have them more involved. Though I am informed that that GPGA generally take a hands off role, they do at least currently have one director on the board.

Further Notes
Current shares outstanding 245M.
HGL selling shares announcement. HGL state they will receive pre tax NTA as at 30 Sept 2008 less a 12.66% discount. Why is there no mention of the discount in the MMC documentation? Will MMC shareholders profit from the discount or will that can primarily to GPGA?
The original announcement contains a more open discussion of these matters. The key appears to be the transition to wealth management. Perhaps there was some disagreement in the board room over this strategy and consequently GPGA has offered to buy out HGL. The document also lists the perceived disadvantages of reduced liquidity and foregoing investment opportunities.

[Update] I have now spoken to Kevin Eley, Chairman of MMC and CEO of HGL. Kevin was open and frank in our discussion and generous with his time. If the 12.66% discount is passed on to those shareholders who remain invested then this would seem like a fair deal to all parties. However, the 12.66% discount on HGL’s shareholding goes to GPGA. As a courtesy to Kevin I won’t disclose his views, but there are some facts that he highlighted for me.
Neither HGL nor GPGA can vote on the buy back motion. So the decision is up to the other 65% of us. The independent directors and an independent report (as if true independence really exists) both recommend voting yes.
The 12.66% discount to NTA for HGL is correct.

Therefore, other selling shareholders will receive a better deal than HGL, as they will not forfeit a 12.66% discount.

All in all it appears to be a sweet deal for GPGA. They get to buy at discount to NTA, avoid any takeover battles that may have ensued if HGL put their share up for sales and they gain effective control control of the business without paying a premium for such control.

Conclusion

• Any shareholder who wants to sell their shares within a short time frame may be best to vote yes and sell their shares. A price around $0.70 appears to be a good deal for you.
• Other shareholders need to consider their options carefully. If the vote is Yes, then simply holding your current shares is not a good strategy.
• Kevin Eley appears to be acting in a fair manner, especially considering his difficult position of Chairman of MMC and CEO of HGL.
• GPGA may have won a battle and are definitely getting a good deal.

NOTE: I have not decided how to vote yet and may vote YES.