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.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.