Ann CrottyJust days after the Bell family had been offering minority shareholders in heavy equipment manufacturer Bell Equipment R53 a share to buy them out, members of the family started selling those very same shares at prices significantly below the offer price. As small-cap analyst Anthony Walker remarked, “It’s intriguing”. Richard Cheesman of Urquhart Partners described the sales as “bizarre”.
Generally, after an offer fails, the share price falls below the offer price, and the bidder starts vacuuming up as many shares as possible. This way, if there’s another offer later, they’ll have fewer shares left to buy. The stock closed at R41 on Tuesday.
So, does this mean shareholders should assume the Bell family (through IA Bell Holdings) is no longer interested in delisting the company and, therefore, isn’t planning on a second buyout bid? Or, rather, a third. The first, which was indicative only and never formalised, was made in October 2021. It was pitched at a mere R10 a share and sparked outrage among an active minority shareholder base that held 30% of the stock. Even the independent board and independent expert appointed to pass judgment on its “fair and reasonableness” couldn’t bring themselves to do so.
That’s because the R10 was way short of the share’s net asset value of R38 at the time and also below its share price. However, it was in line with the R10 a share paid to John Deere to buy that company’s 30% stake in Bell Equipment in 2021.
So, why are members of the Bell family now selling shares they had seemed so keen on getting hold of just a few days earlier? It’s difficult to make sense of it – other than “optics” – and the family is making no comment.
Opportune Investments CEO Chris Logan is a longtime Bell Equipment shareholder who abstained on the R53 offer vote after listening to the chair’s response to his questions during the meeting. Logan says the share trading was perplexing, particularly in the context of some of the smart trading the Bell family has done over the years. All the way back in December 2007, various members of the family sold a combined 4-million shares at R50 apiece during what turned out to be a rare surge in the share price. That lasted for about a year before the stock fell back to around R10.
Few doubt that Bell Equipment has a great product, which has a great reputation, not only in South Africa but across the globe (70% of its articulated dump trucks are sold in the northern hemisphere). It just doesn’t seem to be able to convert its product excellence into sustainable share value. IA Bell believes it will do better in a delisted environment.
Plummeting returns
Still, for a long while, things did look good. In 2000, five years after it listed on the JSE, US multinational John Deere snapped up a 32% stake and jointly controlled the board with the Bell family’s IA Bell, which held 38%. The combination worked well.
In the years to 2012, the return on capital averaged 13%. In 2012, concerns about possible action by US competition regulators prompted Deere to take pre-emptive action and move off the board. Things got a bit messy. In terms of the shareholder agreement underpinning that move, neither Deere nor the Bell family would be allowed any directors on the Bell Equipment board.
It wasn’t long before the operational consequences were felt; returns plummeted to 6%. Writing in July 2020, Kerem Aksoy, chief investment officer of Glacier Pass Partners in New York, and Carson Mitchell, managing member at Shipyard Capital Management, described Bell’s haphazard expansion, which had seen a swelling in inventory from 150 days in 2012 to 240 in 2020.
“Gearing approaches 50%. Nor is this underperformance due to South Africa’s woes; rival Barloworld has hoed the same rows while consistently exceeding its cost of capital,” they wrote.
The two investors, who had been shareholders for almost four years, blamed the board for the poor performance and called on the Bell family to intervene. “Current management has done little but lard the balance sheet with unproductive assets, alienate engineering talent, and snub investors who have sought to hold them to account,” said Aksoy and Mitchell.
In September 2020, Deere evidently decided that, without board representation, it was in no position to fix things and started discussions about selling back its 32% stake to the Bell family. Investors sat up, hopeful that the share price, then languishing at R5, would surge towards its NAV of R38 and that Bell would extend whatever it was offering Deere to all minorities. Sadly, for investors, it seemed Deere was so keen to get out it was prepared to accept a measly R10 a share.
But it was several months before Bell made even an indicative offer to minority shareholders, and when it did, it was at the same price.
Shareholders were understandably outraged. Mitchell said the situation was shot through with conflicts – not least of which was that Gary and Ashley Bell are directors of Bell Equipment and the sole directors of IA Bell, the family holding company which was making the offer. He reckoned the business would fetch between R50 and R80 a share in an open auction. “Rather than dissipate shareholder funds bringing unserious offers, the Bell board should retain bankers and run an open auction for the business,” said Mitchell.
And, it turned out, the R10 paid to Deere was not the full picture. There was an “agterskot”. This additional contingent payment would be paid to Deere if IA Bell sold Bell Equipment to a third party within two years for more than R10 a share. The agterskot would be 50% of anything above R10.
Too attractive to ignore
The agterskot clock started ticking in September 2021 when the repurchase of Deere’s shares was finalised. Two months later, the offer to minorities was abandoned. Both the independent board and independent expert had failed to stamp the R10 offer as “fair and reasonable”, and IA Bell opted not to increase it.
It might have just been a coincidence that in October 2023, just as the agterskot expired, key investors – Peregrine, Peresec and Zenithar, who turned out to be concert parties – started buying Bell Equipment shares, eventually building up a combined 15% stake. On the back of steady demand from these investors, the share price surged from R17 in October 2023 to R30 in June 2024. For many long-term shareholders such as Allan Gray, Sanlam and former Grindrod chair Ivan Clark, who presumably believed there was no deal in the offing, the prices looked too attractive to ignore.
Then, in July 2024, came the comparatively generous offer of R53 a share. IA Bell and the parties, who had been buying up shares in late 2023, had a combined 85% and wanted to buy out the remaining 15% and delist the company through a scheme of arrangement. Many thought it was a slam dunk. Even Logan, who had spent years urging management and the board to take action to realise the true value of the business, thought it was a reasonable offer though not a “huge bargain”, given that Caterpillar trades at eight times NAV.
However, not enough of the 15% shareholders were persuaded to back the scheme of arrangement, which needed the support of 75% of those 15%. A large enough block of these shareholders, including Mitchell’s Shipyard Capital Management, suspect the Bell family is planning to on-sell Bell Equipment at a hefty premium to the R53 on offer in the not-too-distant future. They’re holding out for something better.
At the shareholder meeting on September 12, 10.9-million of the potential 14.4-million shares that could vote were represented; 5.8-million shares (53%) voted in support of the offer, and 5.1 million (47%) voted against it. It’s likely that many years of battle with the board have hardened a core of the Bell shareholders and made them more sceptical. Mitchell, for example, tells Currency: “Shareholders understood that if the Bell family were willing to buy at R53, fair value must be well higher than that.” Ironically, IA Bell might have been successful if Peregrine, Peresec and Zenithar hadn’t bought out the weaker investors.
An international tie-up?
So, what now? Logan says though he was surprised the offer didn’t succeed, he’s happy the company will remain listed but wonders if it can be successful under its current management. He doesn’t rule out a deal with a major international player. Though, as Cheesman points out, there appears to be nothing on the horizon right now. He says Toyota did look at the business some time ago but walked away due to personality clashes and because Toyota’s engines underperformed the Mercedes-Benz engines that Bell uses. Another option is a listing in the UK which, says Cheesman, the company hinted at some years back.
Mitchell, meanwhile, remains optimistic that IA Bell will craft a value-enhancing deal with one of the major international heavy equipment groups. “Based on comparable transactions in the heavy equipment space, my guess is that Bell’s articulated dump truck (ADT) business would sell for 1.5 to two times book value, i.e. R90 to R120 a share at year-end 2024. I encourage the Bell family to publicly commit to running an auction process; there are a half dozen or so global excavator manufacturers who lack an ADT and who could justify a rich purchase multiple due to product and distribution synergies.”
As for the recent share sales by the family, Mitchell is not as perplexed as other commentators. “The family selling their immaterial personal shareholdings is certainly not a statement about valuation; the same family wanted to buy at R53 earlier this month. Nor is it likely to reflect a need for liquidity; Ashley Bell’s personal holdings were only around $6,000. My guess is that by jettisoning their personal holdings, Gary and Ashley position themselves to sit on an independent committee formed to evaluate a future offer, probably one in which the family holding company [IA Bell] sells itself to an acquirer and the acquirer’s offer is extended to all Bell shareholders.”
* This story was amended on October 5 to better reflect the point made by Richard Cheesman.
Top image: Collage. Rawpixel/Currency
