I consider the offer undervalues Trilogy.
Based on the currently available information, I plan to vote against the offer.
The substantial security holders can reject the offer
For the offer to succeed, it requires 75% acceptance from
voting shareholders.
This means that if a shareholder acquires a 20% shareholding, it will likely be able block the offer. This is because, while 20% is not 25%, some shareholders won't vote and others, such as myself, will also vote against the offer.
It also means that even without a 20% shareholding, a few substantial security holders could, together, block the offer.
This means that such substantial security holders will have some negotiating power in the months ahead.
Home Fragrance likely has some value
We all agree the 'home fragrance' business has performed very poorly.
In the six months ended 30 September 2017, this business unit has outright lost money.
That being said, given its substantial market share in Australia and New Zealand, plus the potential synergies available to a purchaser, it is my opinion that this business unit will have some value to an acquirer.
However, because this business unit has minimal (sometimes negative) earnings, considering it's value based on a multiple of earnings discounts the underlying value of the segment.
Material value is in 'Natural Products' segment, particularly in Asia
The real value of Trilogy is in its 'Natural Products' business – particularly sales in Asia, which have experienced strong growth.
Trilogy does not split out its sales in Asia, instead includes it shows its 'Rest of World' financial performance. However, when considering Trilogy, 'Rest of World' appears to be largely synonymous with 'Asia'.
In the six months ended 30 September 2017, 'Rest of World' sales of 'Natural Products' accounted for roughly one third of Trilogy's EBITDA.
The following table shows 'Rest of World' revenue and EBITDA for 'Natural Products', in six month increments, over the past 54 months.
Attachment 9339
In recent periods, Trilogy has earned between 35% and 40% EBITDA margin on sales through this segment.
It is this segment and opportunity that I am concerned is being sold far too cheaply.
It is also this segment which I consider has the most potential synergies for CITIC.
Final comments
It is important that people vote.
If you are against the scheme, your vote does matter, particularly because of the 75% threshold.
For the scheme to be approved, each vote against the scheme will require three votes for the scheme.
The ultimate outcome will, to a large extent, depend on the substantial shareholders; as well as the value of the shares assessed by Grant Samuel, the independent adviser.
My hope is that the substantial shareholders push back on the offer, so that the deal is either cancelled or CITIC raises the offer price.
Te
DISC: I
hold between 20,000 and 25,000 shares in Trilogy, representing less than 0.05% of the shares on issue.