(May 8): When an offer appears too good to be true, it usually is. We were reminded of this little bit of wisdom just this week. And we are sharing our experience with readers, to serve as a reminder that we must remain vigilant at all times.
On April 20, the Global Portfolio received an interesting proposition that came through the legitimate broker email channel. The letter of offer was a one-pager and consisted of the basic information — that Ponos Industries LLC was offering to purchase up to 500,000 shares of The Boeing Co at US$180 a share in cash. If more than 500,000 shares were tendered, the offeror would accept the shares on a pro rata basis. Acceptance of the offer had be conveyed to the broker by May 4.
The last close price for Boeing that day was US$154, which means the offer was at a smart 16.8% premium to market. Easy money.
On May 6, new information not previously disclosed on the offer surfaced: “Upon acceptance, the offeror may extend the offer for successive periods of 45 to 180 days until the market price exceeds the offer price. During this period, your client will not be able to sell the shares, as they will be earmarked.”
This was a critical piece of information. It meant the offer could be repeatedly extended until the market price exceeded US$180. Worse, the tendered shares would be locked up during the entire period.
In essence, the offeror gets a free option on the shares! And it will exercise this option only when the market price rises above the offer price. At this point, it will presumably sell the shares, pay the original shareholder the offer price and pocket the difference. Easy money indeed … for the offeror, that is.
So, who is Ponos Industries and how can such onerous — yet, still legit— offers be allowed by the stock exchange and regulators?
A quick search on the internet came back with some very interesting facts.
Not surprisingly, there is very little information on Ponos Industries. It is described as “a limited liability company organised under the laws of the Caribbean Island of Nevis, that invests in publicly traded securities whose value it expects to appreciate over a 12-month period”. Notably, Ponos had previously made similar offers to purchase a small number of shares of AT&T, General Electric, PG&E Corp and Campbell Soup Co in 2018. This time around, aside from Boeing, Ponos also made offers for shares of Oracle Corp and Exxon Mobil Corp. These are all very wellknown, large-cap stocks.
The majority of these companies have subsequently issued statements to their shareholders to reject the bids.
Who should be responsible for protecting the interests of the man-in-the-street investor?
The US Securities and Exchange Commission (SEC) has an entire page on what it terms “mini-tender offers”. The regulator goes on to caution shareholders that such offers often have limited disclosures — that are not properly disseminated and usually contained in fine print — and are devised to confuse.
It says, “We believe these practices are ‘fraudulent, deceptive or manipulative practices’ within the meaning of Section 14(e), and we recently brought an enforcement action to stop such practices.” Though, clearly, not all.
Because these offers seek to acquire less than 5% of a company’s outstanding shares, they can avoid many of the filing, disclosures and procedural requirements of the SEC. In other words, despite the SEC’s guidance and caution, legally, investor protection is minimal.
What about the brokers-dealers and banks, participants that hold the stocks on behalf of their customers, and whose channels these operators rely on to forward their offers to the beneficial shareholders?
Often, these participants do not request for copies of the actual offer documents or forward them to the shareholders. Case in point: The offer letter we received merely states the name of the offeror, the offer price and deadline for acceptance.
Should these dealers-brokers and banks be held accountable for the irresponsible onward transmission of such offers — that are nothing more than a scam — and without disclosure of all the material information?
The reality is that scams will always exist, in good times and bad, preying on our fears or greed. And they come in all colours and sizes. Sometimes, we can see through these scams quite easily. Other times, they are deceptive, disguised under a cloak of apparent legitimacy. Thus, we should always be alert. Caveat emptor.
We added Starbucks Corp to the Global Portfolio last week. The coffee chain reported a 5% drop in sales for the quarter ended March 2020 and an outsized 47% decline in earnings per share with almost all stores, globally, closed for some period of time. US comparable sales in the last week of March fell as much as 60% to 70%.
We expect its current quarter results will be worse, reflecting the full brunt of restrictive movement measures. Nonetheless, we believe sales will recover fairly quickly, with the gradual resumption of economic activities.
Getting your regular coffee is a routine and comfort that does not cost much. Indeed, outlets that stayed open for drivethru and delivery reported a much smaller comparable sales decline during stay-athome orders. In addition, prior to the outbreak, more than 80% of sales in the US, Starbucks’ biggest market, were on-the-go — well suited for social distancing.
The company plans to have 90% of stores in the US back in operation by June, with a “monitor and adapt” strategy that includes emphasis on cashless app orders, entryway or curbside pickup and contactless delivery.
Meanwhile, sales in its second-biggest market, China, have been encouraging since stores reopened and are on track to full recovery within two quarters. China is also its fastest-growing market — Starbucks still plans to open 500 new stores in the current financial year, while deferring another 100 to 2021. It stands to benefit from current troubles at competitor Luckin Coffee.
The Global Portfolio gained another 4.2% for the week ended May 6. ServiceNow was the top gainer, surging 25.2% to a fresh all-time high. Tech stocks have been outperforming the broader market in recent days. They are widely viewed as relative safe havens in the pandemic fallout.
Total portfolio returns have risen to 4.7% since inception. By comparison, the benchmark MSCI World Net Return Index is up just 0.4% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
