Another twist has emerged in the Sirius Minerals (LSE: SXX) takeover story. City hedge fund Odey Asset Management has taken a 1.3% stake in the firm and is agitating for a higher bid. Odey believes that the Anglo American offer “does not represent fair value for shareholders in Sirius”.
What does this mean for Sirius shareholders? And should they take any action with respect to the Anglo American bid?
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Anglo offer is not final
In an open letter to the management of Anglo and Sirius, Odey points out that Anglo American has not declared its offer for Sirius as a final offer. This means that, if necessary, Anglo could increase its bid.
Odey’s view is that Anglo hasn’t made a final offer because the miner believes a rival firm might yet make a higher bid. In this scenario, Anglo American would naturally want to be able to increase its offer.
The lack of a final offer also implies Anglo American would be prepared to pay more for Sirius if necessary. Odey’s view is that the investment case for the Woodsmith Mine would remain “highly attractive” for Anglo American, even at a higher bid level. I agree that this seems a fair conclusion.
Odey is targeting a 7p bid
Anglo American’s offer of 5.5p per share values Sirius Minerals’ equity at about £405m. Odey has said it will vote against this offer, unless Anglo declares it as a final offer.
In today’s letter, Odey points out that Sirius’s latest set of accounts show an equity value of £893.1m. However, these accounts date back to 30 June 2019 and include £349m of unrestricted cash.
The group’s unrestricted cash balance had fallen to just £59.9m by 31 December, and I suspect it’s even lower today. I don’t see £893m as a realistic valuation.
Odey seems to accept this view. The hedge fund says it will “vote in favour of any bid at 7p or above.” A 7p bid would value SXX equity at £490m, about 20% above the current offer.
A quick profit for Odey?
Odey isn’t a long-term Sirius shareholder. The hedge fund appears to have bought its shares during the last few days. I suspect its fund manager Henry Steel, who signed today’s letter, bought the stock when it was trading below 5p earlier this week.
This suggests to me Odey is likely to make a quick and easy profit, even if no higher bid appears. The only scenario I can see in which it might lose money is if shareholders reject Anglo’s offer and the company is forced into administration.
What should Sirius shareholders do now?
Anglo American’s current offer is legally structured as a Scheme of Arrangement. This means if 75% of the shareholders who vote support the offer, it will apply to all shareholders.
Odey notes that voter turnout at previous Sirius AGMs has been low, at around 35%. This gives “magnified power to Sirius shareholders who do vote.” It’s worth noting that Odey’s 1.3% stake could be enough to swing the balance in a vote.
Rejecting Anglo’s offer might lead to a higher bid. But it might not. Personally, I’d accept. But it’s your choice…