This fund stock could increase by 35% if the redemption limit is lifted: Investors
Caledonia Investments could see its share price rise more than 35% if restrictions on share buybacks are lifted, according to fund manager Brian McCormick. Caledonia invests in private companies and funds as well as publicly listed companies such as Microsoft, Oracle, Moody’s, Philip Morris and British American Tobacco. The company, which trades as an investment trust on the London Stock Exchange, said it has assets worth 3 billion pounds ($3.8 billion). Shares are also traded over the counter in the United States. McCormick, who runs the Jupiter Global Value fund at Jupiter Asset Management, said Caledonia’s share buybacks are limited due to share ownership restrictions as set out in the UK’s Takeover Code. The Code is designed to protect the interests of minority shareholders by making it difficult for a significant minority shareholder to become a majority shareholder. The code requires any shareholder who wants to own 50% or more of the company to make an offer to buy out all remaining minority shareholders. While the Code serves an important purpose, McCormick says that in Caledonia’s case, it is preventing the company from taking actions that benefit all shareholders. “There is a catalyst here if the company can remove the restriction that is preventing it from repurchasing its own stock at once,” McCormick told CNBC Pro at the London Value Investor Conference on May 15. meaningful way”. Does buying it again help? With Caledonia’s shares currently trading at a significant discount to its net asset value (NAV), McCormick said, “it would be very, very beneficial for the company to use more of its cash to buy stock again.” NAV represents the underlying asset value of an investment fund. Caledonia’s NAV of £53.69 per share means the market is currently undervaluing the company by around 37% as its shares trade at £33.75 per share. In theory, this means that if the fund were liquidated and dissolved, the cash proceeds would be 37% higher than the fund’s current stock market value. Additionally, when a fund repurchases shares while the stock is trading below NAV, it is purchasing its own assets at a 37% discount. Share buybacks also tend to increase stock prices. Caledonia’s buyback limits When a company buys back shares, those shares are canceled, which can increase the ownership percentage of remaining shareholders. In the case of Caledonia, the Cayzer family and related parties currently own less than 49% of the company’s shares. If that ownership level rises above 50% as a result of an acquisition, that will trigger the provisions of the Takeover Code. Caledonia Chief Financial Officer Robert Memmott acknowledged the limitations on buybacks but said the company would continue to buy back shares within those limits. “During March and April, we purchased 290,000 shares at an average discount of 36%, which is NAV per share,” he said on the company’s earnings call last week. coupon is £0.101”. “And we will continue to buy back, but within the limits that we have.” Analysts also agree that Caledonia’s limits on share buybacks are currently holding back the share price. “[The shares trading below NAV] offers some value, but we’d always expect the discount to be relatively broad given the size of the Cayzer family’s concert party, which also limits the size of any acquisition which shares could be taken,” Stifel analyst Iain Scouller said in a note to clients on May 21. Could Caledonia be approved? In certain exceptional circumstances, the Takeover Panel may be willing to grant an exemption allowing Caledonia to repurchase additional shares, even if doing so would leave the Cayzer family as such a majority shareholder. . The exception is designed for difficult situations when a business needs money urgently and a large shareholder is willing to bail out the business in exchange for additional shares. Under normal trading conditions, the Takeover Code would prevent a company from issuing additional shares to shareholders. , which will increase the level of ownership. McCormick said Caledonia needs to work directly with the Takeover Board to find a solution. He added that, even as a minority investor in Caledonia, he would support any potential move Caledonia sought. permission of the Takeover Board. “[The company] need to get the Board involved to get a Rule 9 waiver, which would allow them to buy back shares much more aggressively,” McCormick said, referring to the rule limiting buybacks in this case .this in exceptional circumstances and here there are very clear benefits for all shareholders. We just need exemptions and some enhanced protections for minority shareholders to be structured Fit.”
