Shareholders put brakes on Dawn buyback

What is going on at Distribution and Warehousing Network?

In December last year, the company shocked minority shareholders when it announced that it intended forking out R664-million to buy back 78million shares held by its BEE shareholder, Ukhamba Holdings, at a 20% premium to the share's trading price.

This week, Dawn told shareholders it has "decided to re-engage Ukhamba in discussions regarding the proposed repurchase" - seemingly with a view to getting something knocked off that hefty price.

Now, some shareholders have indicated they would not support a new rights issue of up to 38million new shares, which is taking place at the same time to raise more cash.

Dawn's decision to re-engage Ukhamba was prompted by the weaker-than-expected half-year results released recently. These made sure there was no recovery in the Dawn share price or in shareholders' sentiment.

In October last year, Dawn's share price plummeted from R10 to around R7 after it reported a 24% slump in headline earnings per share for the year to June. Despite the knock in earnings, the dividend was maintained, reflecting management's optimism about working capital developments and trading conditions. Collin Bishop, Dawn's chief operating officer, said that when the repurchase price was agreed with Ukhamba, the Dawn share price was about 800c.

But it is unclear why the price was not readjusted in line with the weaker trading conditions before announcing the repurchase in mid-December, when the share had slumped even further to 640c.

Chris Logan, a Dawn shareholder, is perplexed about the R8.50 per share that Dawn has offered Ukhamba for its 78million shares - equivalent to 32.25% of the company.

Ukhamba has been involved with Dawn since November 2004, when it bought a 39% stake. At some stage last year, and for reasons that have not been disclosed, Ukhamba decided to sell its Dawn shares. The Dawn board decided "to engage with Ukhamba with a view to ensuring a controlled exit of Ukhamba from the company", according to its announcement in December.

Analysts said a specific repurchase of the shares by Dawn seemed the best option, particularly as the proceeds would be tax-free in Ukhamba's hands. The sticking point was the price.

"It's inexplicable that Dawn was prepared to pay 850c for a share that was trading at 700c and now is trading around 640c. There's something strange going on," said Logan. He believes the deal won't go ahead if a lower price can't be negotiated.

As if to highlight the strangeness of the R664-million repurchase, Dawn's announcement that it wanted to issue 38million new shares for cash "to one or more investors who have yet to be identified by the board" is equally cryptic.

The 38million shares would presumably be issued at around the current share price of 640c. This R248-million from the rights issue would help the company, which has low gearing ahead of the repurchase, to fund the repurchase and additional acquisitions.

The proposed buyback was strange - and, in terms of the JSE's regulations, it is prohibited. A company cannot pay a premium of more than 10% to the trading price of the previous five days.

To address this, Dawn hired BDO Corporate Finance to provide a fair and reasonable opinion on the 850c being offered to Ukhamba. Then, the company intended seeking the approval of 75% of the Dawn shareholders, excluding Ukhamba and management. After that, the Takeover Regulation Panel and the JSE would also have to approve the transaction.

But the weak interim results have forced a rethink of the plan. Anchor shareholders with more than 30% of the issued share capital have persuaded the board to try for a more appropriate lower price.

Bishop said they hoped to begin discussions with Ukhamba next week.