A Value Investing Blog

Posted on 30 Jan 2017 by Steve Johnson

CIMIC Bid Underwrites Value for Macmahon Shareholders

CIMIC Bid Underwrites Value for Macmahon Shareholders


It has been expected for a long time. If the AFR is to be believed, it isn’t the first bid CIMIC Group has lobbed on the table. But CIMIC’s early 2017 bid for the 80% of Macmahon it doesn’t already own is the first serious attempt to relieve minority shareholders of their holdings.

The Australian quotes us this morning as being “angry” at CIMIC for the bid. Quite the contrary, the bid is excellent news and we are happy it has finally arrived.

Firstly, CIMIC has the right to bid any price they want. They have given all other shareholders a free put option for the next few months. The bid is “unconditional” and can only be withdrawn under very limited circumstances. That means shareholders can observe the next few months, carefully analyse the response from management, all the while maintaining the right to sell their shares to CIMIC for 14.5 cents. It is hard to complain about that.

Secondly, for the past few years we have been pushing the board to do more to realise the value inherent in Macmahon’s business. Defending this bid from CIMIC will force their hands.

They have already stated that they think the bid undervalues the company. Now it is time to prove that the value they (and we) see in the business can be realised. The response to CIMIC’s bid needs to have a clear focus on returning cashflow to shareholders over the next few years. That should include surplus cash on the balance sheet and cash from operations. A public commitment on this can only be good for shareholders.

Fewer words, more action

Finally, Macmahon needs to show it can win profitable contracts and return to being a sustainable business. There has been a lot of talk about pipeline over the past 12 months. There has been some suggestion that CIMIC’s bid is a defensive move to remove a resurgent competitor from the market.

Those words need to turn into action. Unlike small nimble players like MACA Limited, and despite dramatic cost cutting in recent years, Macmahon has the infrastructure and systems of a large mining contractor. It needs something like $500 million per annum of revenue to justify its large-company overheads. If it wants to avoid being gobbled up, it needs to show shareholders some contract wins. Last week’s announcement suggests we should see something in the coming weeks.

Our base case valuation for the company is around $0.20 per share. The company has $0.17 per share of net tangible assets (mostly mining equipment at heavily written down book values). Roughly 30% of that is net cash, and a recently expanded flagship contract at the Tropicana gold mine underpins the rest.

CIMIC’s bid provides some nice downside protection and has spurred the board into action. But patient shareholders are likely to do better and we have added to our holdings since the bid was announced.

*As of close of business Friday 27 January 2017, funds managed by Forager owned 8.63% of Macmahon’s outstanding shares.

General advice only

Forager Funds Management provides general information to help you understand our investment approach. Any financial advice we provide has not considered your personal circumstances and may not be suitable for you.


CIMIC Bid Underwrites Value for Macmahon Shareholders

6 thoughts on “CIMIC Bid Underwrites Value for Macmahon Shareholders

  1. I like the free put analogy. I was thinking the same thing, but had not come up with that description.

    Given the limited downside, and large cash holding of the company, I am surprised it is not trading higher today.

    I picked up some more shares today as well.

  2. Agree with almost everything written here.

    As a holder of a large number of WCB shares (yes, two takeover bids and an ETF squeeze (SLX) in my top five holdings has made this a profitable week), I know first hand that holding a blocking (i.e., 10%) stake in a business has a whole lot of value. Right now, it seems that FOR is the only one in the position to pick up such a stake.

    Even if CIM gets an outright majority, Forager should be able to bring them to heel if they really want all of the benefits (i.e., confidentiality, elimination of a competitor etc.) of absorbing MAH into their business.

    The risk, however, is that CIM gets majority control of the MAH board, and turns MAH into a scavenging contractor, with CIM’s puppeteers keeping MAH from competing with CIM on the high margin work. In that instance, the ownership structure would lead directly to an impairment of value for shareholders, that although technically illegal, would be very difficult to challenge in court.

    • Holding out doesn’t always pay. The mop-up bid for WCB is 6% below the original one 3 yrs ago, and no dividends have been paid in that period. You need the 10% shareholder to accept, or this bid and the price falls away again

      • True, holding out doesn’t always pay but in this instance it would seem to. The statement that “you need the 10% shareholder to accept, or this bid and the price falls away again” is incorrect- you can sell your shares on-market at any time at the takeover offer price before CIMIC could withdraw its offer.

        It’s instructive that CIMIC have made almost no headway in buying stock in the market. Clearly, shareholders see the bid as underpriced & are unwilling to transfer the value they hold to CIMIC. Whilst there are no certainties, if CIMIC cannot get any traction with the bid they will have to come back with a more generous one in time which while probably not reflective of the true worth of the company….it would certainly have to be a material increase on what is tabled at present. There’s reasonable optionality on offer for shareholders

        • My comment related specifically to the bid for WCB (Warrnambool) where Lion has a blocking stake of 10.2%. Its a high stakes game of chicken to see who, if any, yields first, but if you’ve been behind for 3 years, it may well be time to chicken out and sell on market while the bid is still on (as you point out).
          CIMIC are also exponents of the hardball game, and whilst there’s no need to make a call yet on what to do as a holder of MAH, a successful outcome is likely to require extreme patience and only a modest number of holders chickening out during this current bid.

  3. Hi Steve, I took BYL out of the bottom draw a couple of months back and have averaged down considerably. There is or was a connection to Macca as a major shareholder hence the comment here. The market has hated BYL and I guess they saw them as another WDS/HDX. But profit update in late November expects (hand on heart?) a $5M half year profit before tax. If they can double this for the year they are more or less back to pre fall of a cliff days and might actually produce a dividend – I hope. They look like they have reduced debt as well.
    Are you looking at these guys at all?
    Do you disagree with my prognosis?

Leave a Reply

Your email address will not be published. Required fields are marked *

Security Test *

As featured in