Meat of the deal crucial

16:00, Jan 26 2013
All cut up: An announcement about the sale of the Mad Butcher business excited some investors, but they should pay close attention to details of the deal.

With apologies for despoiling the poetic lines of Thomas Gray, where ignorance is risk, tis well to be wise.

Most investors are well aware of this, yet it seems some prefer to think of ignorance as blissful and charge into the sharemarket without a second glance.

These investors, who were fortunately using fairly small amounts of money, could be seen just before Christmas piling into an obscure stock named Veritas Investments.

Mad Butcher owner Michael Morton.

The cause of their excitement was an announcement that Veritas was to buy the Mad Butcher business made famous by its ebullient founder Sir Peter Leitch.

After the announcement on December 20 Veritas shares leapt from 6c to 11c, gaining 83 per cent within two days.

Perhaps some investors had been hypnotised by years of ads for chicken legs at $5.99 a kilo, or perhaps they were simply a sausage short of a picnic, but a pause for thought would not have gone amiss.


Veritas, you see, is a shell company. It has no income and has a few hundred thousand dollars of working capital to pay its bills until a real business comes along to fill its hollow husk.

Even at 6c its shares were valued at a remarkably high level, giving Veritas a market capitalisation of $3.4 million, well above its net asset value of $608,638 at last balance date. Its NZX listing has some value, sure, but only insofar as it saves the cost of someone creating a new listed vehicle.

A little look at the origins of Veritas provides further background.

The company was previously a listed investment fund known as Salvus Strategic Investments, until its shareholders decided it should be liquidated and cash returned to investors. This was duly done in late 2011, but in a scheme spearheaded by shareholder Simon Wallace it was also decided to allow the shell of the company to remain so another business could use it to list on the stock exchange.

Salvus changed its name to Veritas and held a rights issue to raise cash to pay ongoing listing fees and fund the search for a suitable business for backdoor listing.

The rights issue took place last June at 2c a share, raising $691,744. A further handful of stock was issued to law firm Harmos Horton Lusk for services rendered, at 3c a share.

That gave Veritas a total of 57.3 million shares, which will next week be reduced to 2.3 million shares in a 25 to one consolidation. The Mad Butcher is to be acquired for $40m, with $20m coming from the issue of new Veritas shares to Mad Butcher owner Michael Morton, plus $20m of cash from third party financiers which the company intends will ultimately be replaced also by the issue of shares.

A prospectus for that share issue is due to be published in March.

So in effect the acquisition is to be financed entirely by the issue of shares. The issue price - and therefore the quantity - of those shares has yet to be determined.

Even without going through the potential arithmetic of the share issue, it should be apparent that Veritas investors were premature to think the stock was suddenly worth 11c, or any particular number.

There are other reasons to look askance at the early reaction.

Very little is known about the financial value of the business being acquired - Mad Butcher Holdings.

Morton acquired it for an undisclosed sum in 2007 as the franchisor co-ordinating product procurement, nationwide marketing, promotional programmes and operational support for a franchise network of 36 butcher stores.

We've been told the retail franchises generate revenue of about $150m, but what that translates to for the franchisor has not yet been revealed.

We know there are franchise contracts governing the network, but it will be useful to know how franchisees feel about their end of the deal. And there will be other contracts, such as supply agreements, relevant to the structure.

These and other important details should be clarified in the independent report to Veritas shareholders and in the share offer prospectus, but until then investors would be best to stay on the sidelines and await developments.

Having said all that, Mad Butcher will be an interesting prospect for investors who follow the small end of the market.

Although a backdoor listing, the arrangement will have a similar level of information available as an initial public offer, which is welcome. The franchise has a strong brand identity and a long track record which should help it navigate a future with less involvement from Leitch.

We'll have another look at it when the offer documents come out.

Tim Hunter is deputy editor of the Fairfax Business Bureau.

Sunday Star Times