TOP IDEAS: Buyer admits low-ball offer of $1.70 is priced at significant discount to Galvanic Applied Sciences (TSXV: GAV) stock’s true worth.
In March of this year we wrote a blog post about one of our Top Ideas - Radiant Communications Corp. concerning an ugly takeover offer forced upon its minority shareholders (See: Radiant Communications shares are a steal - Too bad they are getting stolen). Fortunately with the help of this blog and several articles in the Financial Post (See: Radiant’s plan to go private not good enough for minority) the injustice of the Radiant privatization offer for minority shareholders was exposed and did not materialize.
It is four months later and here we go again. This time: Galvanic Applied Sciences Inc. (TSXV: GAV - $1.68)
Fiscal 2013 was turning out to be another good year for Galvanic. For the first nine months which ended on January 31st, the Company reported it earned $0.17 per share in earnings. Consistent over the past two years was Galvanic’s 12-month run rate of $16-17 million in revenues and earnings of about $0.22 per share.
Headquartered in Calgary, Galvanic has two major operating segments: one in Canada, the other in the USA. Galvanic Canada develops analyzers for the natural gas processing market and electronic flow and pressure measurement products sold into the gas distribution market. Galvanic Lowell, the Company’s US-based unit, markets liquid process analytics instrumentation for an array of industries. Both operating units sell their products within their domestic markets and internationally.
On June 28, 2013 the good news story for Galvanic’s shareholders took a wrong turn. The Company disclosed it had received a tender offer to be acquired for $1.70 per share (C$26.7 million) from a trio of opportunistic US private equity investment firms (the "buyers”) acting jointly. Still worse was the news in the offer that the buyers had somehow locked up the shares of a majority group comprising of Galvanic’s largest individual and insider shareholders (holding 66% of the Company’s stock) at $1.70.
Simply said, I am minority shareholder of Galvanic and the $1.70 share offer is extremely inferior. More disturbing is that the buyers of Galvanic’s shares agree with my assessment in their Offer to Purchase document filed with the regulators. In the Offer to Purchase filing, the buyers recommend Galvanic shareholders to accept $1.70 share offer as it is priced at a slight premium to the Company’s Enterprise Value if you exclude cash holdings. Last reported Galvanic had cash and marketable securities of $10.5 million or $0.65 per share.
A Company’s true Enterprise Value (EV) includes cash holdings net of any debt. Galvanic has no debt. Therefore, its the buyers’ own admission that suggests when you include cash holdings, that the true EV of Galvanic equates to their offer of $1.70 per share plus the $0.65 per share in cash held or, otherwise, $2.35. Therefore the premium offer "to accept” implies a 28% discount for the buying group. In other words, the buyers intend to pocket the shareholders’ cash.
We may have stated the obvious but it is the responsibility of the independent board members of Galvanic to do the same and formally reject this inferior offer. Any opinion to the contrary will be met with scrutiny and maybe further media attention for the perceived lack of independence.
Galvanic share price has traded up 15% since the initial posting date on Investorfile's Top Ideas list for small cap value stocks (See: Galvanic Applied Sciences: Not a sexy stock but the fundamentals make it very attractive).
Galvanic Applied Sciences has approximately 15.7 million shares outstanding.
Galvanic Applied Sciences website www.galvanic.com
Author Ownership Disclosure: TSXV: GAV - YES
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