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Is ThinkSmart Limited treating shareholders unfairly?

We abhore company boards that treat minority shareholders differently to others, and it’s one reason why we often call out companies issuing shares through unfair institutional placements.

ThinkSmart Limited (ASX: TSM), an ASX-listed financial services company providing business and consumer leasing, appears to be treating its minority shareholders unfairly through an off-market buyback of up to 64.5 million shares. An on-market buyback will also soak up another 14.7 million shares, removing around half of the company’s shares on issue.

As Forager Funds’ Steve Johnson notes, Founder Ned Montarello owns 21% of the company, but is not going to participate in the buyback of shares. This means that he will roughly double his ownership share of the company, using company cash to buyout minority shareholders and reducing the already low liquidity.

The problem is that because it’s an off-market share buyback, Mr Johnson says the bidding mechanism is designed to capture the lowest bids possible, while management have complete discretion over how many shares will be bought back and what price the company will pay for them.

Mr Johnson says the offer price range is also unfair. The bottom range is 31 cents, but the company already has 24.5 cents per share in cash, according to Mr Johnson. The remaining business is expected to earn 2 cents per share this year, which suggests Thinksmart is paying a very cheap price to buy back its shares – around 3.5 times earnings.

Forager Funds say 42 cents per share would be reasonable value, but that offers minority shareholders nothing on top to give Mr Montarello much more control of the company he founded.

That doesn’t sound very shareholder friendly to me.

The other problem is that Thinksmart has sold its entire Australian and New Zealand operations, leaving it with a lone UK financial services business. CEO Mr Fernando de Vicente will also be based in London. That may prompt the company to delist from the ASX entirely, potentially leaving minority shareholders somewhere between a rock and a hard place.

The company also warns that the buyback will further reduce liquidity in the shares and “may impact Thinksmart’s ability to distribute franking credits to shareholders in future.

Current shareholders might want to consider voting against the buyback later this month – and contact the company directly to express their disappointment.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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