Over the past few days, I have been trawling the internet searching for any recent buyback announcements which could lead to purchase opportunities. I came across Bioquell.
In the latest financial year, Bioquell profited greatly from the disposal of TRaC, and as a result they have large amounts of cash on their books for which they have no use. As a result, they have announced an offer to purchase 50% of the outstanding shares (43.7m outstanding) for £43.7m at a value of £2 per share, a net return of £1 per share
Naturally, the question of the effect of this followed. The firm currently has a share price of 171p, leading to a market cap of £74.7m. The cash element of the market cap can surely be valued at market price, i.e. the return of £43.7m of the firms cash should decrease the market cap to £31m (£74.7m-£43.7). Further, there will be half the number of outstanding shares (21.85m), resulting in a price per share of c.142p per share.
There are further factors at work – is the market overvaluing the cash element of the balance sheet? One the cash has been removed, ratios such as current ratio, debt/equity etc. will go askew. Further, using the latest financial year earnings of c.£600k profit from ongoing activities, the P/E will then be c.48, down from c.110. This is already a market correction, but as the company significantly weakens its balance sheet we might be able to expect that a P/E this high is unwarranted.
It is worth noting that you may already be able to purchase shares at a price of c.142p. How? Dependent on the format of the selection of shares for buyback (this has not yet been decided), it could be that each person who offers their shares has half bought back, to remain fair. The effect of this is that you could purchase 2 shares today for a total cost of 342p and receive 200p for one share, leaving you with 1 share remaining at a cost of 142p. I expect a selection similar to this – it is the management who wished to return cash to the shareholders. The management has a stake in the firm, and as such will wish to benefit from the cash return, however if their shares happened to be selected and another shareholders did not, they would be open to any number of misconduct charges. As such, I expect it to be a fair representation.
I have no experience in shorting and have never read much about the practise, however I am following this to see how the market treats this buyback. If I were to have a position, I would be short, most probably using American options, but this is strictly a learning experience.
The author has no position in Bioquell.