The share price of Adapt IT jumped by more than 18% in intraday trading on Monday following Huge Group’s unexpected decision on Friday to dramatically up its offer to buy the JSE-listed software services group.

The shares touched a high of R8.17 apiece, the highest they’ve been in almost three years, after Huge said it had increased its all-share offer to Adapt IT shareholders to an effective R9.09/share. They later retraced some of that ground and ended the session up 9.9%.

Investors may be counting on a counteroffer from Volaris Group, the Canadian investment holding firm that is also make a play for Adapt IT. Volaris is bidding R6.50/share in an all-cash deal. However, after Nodus Capital – appointed by an Adapt IT to consider the fairness of the Adapt IT and Huge Group offers – said a price of between R7 and R9.09 would represent fair value, Volaris will probably have to sweeten its offer, too, in the coming days.

On Monday, Huge Group CEO James Herbst spoke out about why his company increased its offer, after earlier telling investors that it wasn’t interested in a bidding war for Adapt IT with Volaris.

“I am on record saying that Huge would not get involved in a bidding war. This was my position and that of the board of Huge at the time. This was not the position of our largest shareholder, which has always believed Huge should increase its offer,” Herbst said. Huge Group’s biggest shareholder is Praesidium Capital Management.

‘Changed circumstances’

“The Nodus Capital valuation changed these circumstances. I don’t think Huge or I have to be ashamed of changing our minds,” he added.

On how Huge Group calculated the R9.09/share valuation figure for Adapt IT, Herbst said this is based on Nodus Capital’s valuing of Huge at R6.65/share. “If you multiple this by 1.37 (the swap ratio), you get to R9.09.”

“The initial Huge offer of R5.52 was based on our own calculation of fair value, which at the time could only be based on the historical financial information it had at its disposal. Our rationale was, has always been, and remains ‘better off together’, and so our initial offer was engineered to ensure that the proposed transaction was earnings neutral to Huge shareholders and Adapt IT shareholders.”

However, Adapt IT said the Huge offer actually equates to R7.21/share, not R9.09. In a statement to investors after markets closed on Monday, Adapt IT said that based on the closing price of a Huge share of R5.26 on Thursday, the day before the revised offer was announced, and using the revised swap ratio, the revised Huge offer consideration equates to R7.21 per Adapt IT share.

Adapt IT said its independent board will now engage with Nodus Capital to provide an opinion on the revised consideration from Huge Group. This opinion will be furnished by Friday, 4 June.

Still, even with the revised offer, Huge Group is likely to face an uphill battle convincing a majority of Adapt IT shareholders to buy into its offer and plan to merge the companies – something that will become even more difficult if Volaris counters its offer with a higher all-cash bid.

Already, shareholders representing more than 44% of Adapt IT’s shares have given their undertakings to support the Volaris offer. It’s believed this includes Adapt IT CEO Sbu Shabalala, who personally holds about 10% of the company’s equity, as well as other members of the top management team.

(Shabalala was recently granted extended leave to deal with serious assault allegations levelled against him by his estranged wife Neo during court divorce proceedings.)

‘Competing for attention’

“Huge and Volaris are now competing for the attention of the remaining shareholders of Adapt IT holding 55.6% of Adapt IT’s total issued share capital,” Herbst said. Huge’s revised offer of an effective R9.09 “must be fair and reasonable because it falls within the independent expert’s (Nodus Capital’s) fair and reasonable value range”, he added.

He also dismissed criticism that a merged Huge Group/Adapt IT will have a lower empowerment rating, saying the combination will not negatively affect Adapt IT’s empowerment status.

“As regards Adapt IT’s transformation agenda, Huge is a South African company that understands transformation, supports it and is committed to it. Five percent of Huge’s shareholders are empowered and this will add to Adapt IT’s BEE status, not detract from it.” — © 2021 NewsCentral Media