Automotive business and crash repairer AMA Group Ltd (ASX: AMA) has today lobbed a takeover bid at the recently listed Automotive Solutions Group Ltd (ASX: 4WD). Automotive Solutions has had a rough time with the company announcing a downgrade in April, just 3 months after listing.
Its shares have plunged 65 cents to yesterday's close of $0.35. AMA Group has already become a significant shareholder in Automotive Solutions, and today announced its takeover offer at $0.35 per share. This represents a 0% premium to yesterday's close, although approximately a 15% premium over the recent volume-weighted average price (VWAP) of Automotive Solutions shares.
What's a shareholder to do?
It's an obviously opportunistic bid from AMA Group but it is hard to argue that Automotive Solutions deserves a higher price. While the company has no debt, it has a weak balance sheet, modest margins, and in my opinion minimal ability to absorb under-performance of the type that its businesses are apparently suffering.
What's more, the board is in turmoil with the recent departure of the CEO. Shareholders seem to have 3 choices:
- Accept the offer of $0.35
- Hold out for a higher offer and sell at the higher offer if it eventuates
- Hold out for a turnaround and improved business performance, risking the downside if this does not eventuate
Each of the three strategies has risks and I would not like to opine on which one is the best. Accepting $0.35 today means wearing a heavy loss, and missing the upside if the businesses can be turned around (or a higher offer is made). Automotive Solutions is very cheap if an investor assumes that business performance will return to previous levels.
Holding out for a higher offer runs the risk of being left holding the bag if the offer falls through. And finally, holding out for a turnaround and improved business performance is likely to be both risky, painful, and a drawn-out process.
Finally for prospective IPO investors, Automotive Solutions serves as a reminder of the risks of investing in this type of slap-together business. When National Veterinary Care Ltd (ASX: NVL) debuted in 2015 I wrote that the "give us $30 million and we'll buy you a company" IPO model was fraught with risk. While National Vet Care turned out well, Automotive Solutions Group did not. As always: Buyer beware.
