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Exploring Miclyn Express Offshore

Exploring Miclyn Express Offshore

One potentially interesting opportunity in the market at the moment is Miclyn Express Offshore (MIO), which provides support, crew and utility vessels to the offshore oil and gas industry. MIO is 75 per cent owned by private equity players Champ and SEA6, and has received from them a conditional, indicative, non-binding proposal to acquire the remaining shares, at a price of $2.20 cash.

At the time of writing, MIO is trading at $2.06 – a discount of 6.8 per cent to the offer price. If the offer were to be completed at that price within, say, 6 months, investors at today’s price would receive an effective annualised return of over 13 per cent, which is not bad.

There is of course some uncertainty as to whether the offer will complete, and that is presumably what is driving the discounted share price. However, it is worth thinking through the arguments to determine whether this discount is appropriate.

Firstly, some background: MIO is incorporated in Bermuda, and subject to Bermudan – rather than Australian – Corporations Law. Bermudan Law lacks some of the protections for minorities that Australian Law provides, and in what appears to be an odd outcome from a governance perspective, the private equity owners are able to vote their shares in favour of their own takeover proposal. With the transaction requiring a 75 per cent majority, the vote seems a foregone conclusion.

To be put to shareholders, the proposal first needs to be waved through by the board of directors. However, with the board of directors controlled by the private equity owners, it seems like there is a good chance this will happen.

This clearly presents some issues from a minority shareholder perspective. The minorities could unanimously agree that the company is worth significantly more than $2.20/share, but still be required to accept an offer at this price. However, while this may seem like an unsatisfactory situation in a broad context, an investor looking to buy today at $2.06, and with the shares subject to the $2.20 offer, may well view it in a different light. Firstly, the likelihood of the offer completing seems to be very high. The private equity owners already own 75 per cent and control the board. They therefore know the business well, are already committed to it, and seem unlikely to discover anything in due diligence that would disrupt the offer. Also, the prospects for an unduly hostile board reception are slim.

Another thing to consider is the potential for an increase in the offer price. The Directors of MIO do have an obligation to act in the interests of minorities, and will obtain an opinion from an independent financial advisor as to the fairness of the offer. There is a reasonable prospect – although no guarantee – that the outcome of this process will be an improvement to the initial offer terms.

This potential upside should be weighed against the downside risk of the offer not completing. While there is significant uncertainty around the possible outcomes (and this precludes a large position size), it appears that in this case the risk/return tradeoff may well be favourable to investors at the current price.

The Montgomery [Private] Fund and The Montgomery Fund own shares in Miclyn Express Offshore.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

  1. At $2.06 or $2.20 the company is very cheap. I bought them 2 weeks before the takeover announcement and consider them to be worth at least $3. I’ve compared them to Mermaid Marines which is a similar business. Mermaid Marines are a great business, Mermaid Marines earn better ROE because of their wharfs they own and charge clients for using it. However, MIO have better OSV (offshore vessel) operations and pay a lot less tax. Earnings have been growing and they are also a very good business. Both companies are very busy and earnings have been growing very nicely for both companies. A lot of vessel services are needed in the oil and gas sector. The biggest risk for me has always been the Bermuda rules, and it didn’t take long for this to kick in. But I made 15% return in 2 weeks, still I’d rather the company not be taken over because I see the shareprice growing over time.

  2. Hi Roger,

    Quick question – with this corporate governance scandal, what is to stop the board from acquiring shares at a price well below $2.20? What is the ‘independent financial advisor’ isn’t so independent, or (more likely) some creative accounting is used to make MIO seem less valuable just before the majority shareholders forcibly acquire the remaining shares?

    Joe

  3. zoran arnautovic
    :

    MIO
    At $2.06 it fits “why bother basket” perfectly.
    At $ 1.80 it did make sense but when you think directors , private equity, Bermuda, etc this tree doesn’t have any low hanging fruit .

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