- Controlling shareholder grouping makes embarassingly low offer for GRPBF.
- Threat to delist company designed to force minorities into a prisoner's dilemma.
- Offer does not take multi-decade growth opportunity into account.
It was with some consternation that I read on Bloomberg that the controlling shareholder grouping was making a voluntary offer to buy out minority shareholders in GRPBF at MXN 17.36 per share.
The share traded above this level as recently as January last year and this is a price that dramatically undervalues the company in my view. GRPBF currently (as at 24 May 2021) trades almost one standard deviation below its Embedded value to estimated sales (EV/BEst Sales) ratio according to Bloomberg. This means the company has only ever been cheaper than it currently is 15% of the time.
I believe that this ratio is the correct valuation measure to use as the company's margins outside its Mexican business are severely depressed.
Its Brazilian business, Vigor, in particular faces a multi-decade growth opportunity in both sales (higher per capita dairy consumption in Brazil, higher market share as it expands into new categories and geographies) and operating profits (as it consolidates a fragmented milk supply chain, as investments into growth start bearing fruit).
To add insult to injury the controlling shareholder grouping have indicated that they plan to "cancel Bolsa listing if they have the shares". This is a thinly veiled way to force minority shareholders into prisoner's dilemma because if the decide not to sell to the controlling shareholder group they may be caught holding a very illiquid share. Due to the fact that that the controlling shareholder grouping controls greater than 75% of the outstanding stock, they are not required to make a mandatory offer as they are only seeking to purchase up to 25% of the company (and not the minimum threshold of 30%).
The last hope for minorities is that its independent board members Eduardo Tricio Haro, Pablo Roberto González Guajardo, Rafael Robles Miaja, Blanca Avelina Treviño de Vega, Carlos Antonio Danel Cendoya, take a stand and make a statement to the effect that the current offer materially undervalues the business. Mexico's CNBV should also intervene on behalf of minority shareholders as it makes a mockery of Mexico's credentials as an investor friendly destination.
Analyst's Disclosure: I am/we are long GRPBF.
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