The timing of MGX`s purchase of CCH, announced this week, may be off, but the potential for long-term benefits makes the deal worthwhile.
The offer by MGX to buy all of CCH, except the infrastructure services business, Infracom, for 24.5 MGX shares for every 100 CCH shares, was apparently agreed to some time ago, when the companies` share prices were far better than recently. At current levels the deal values the CCH share, excluding Infracom, at about 245c.
Another serious question is the matter of how CCH staff will react to being absorbed into the new MGX group.
Iain Scott, Finance Editor, ITWeb
MGX`s share price has been trading at around 1 000c this week, while CCH has been trading at about 280c. Just more than a month ago the CCH share was priced at over 530c while MGX was trading at more than 1 750c a share.
Some analysts have expressed concern about the fact that MGX, although a sound company, faces a dilution of almost 50% in its issued share capital as a result of the share issue, which could have a serious impact.
At the same time, the matter of MGX`s buy-out of EC-Hold minorities has not been resolved. That issue centres on MGX`s offer price of R1 a share, a submission by certain EC-Hold shareholders led to an investigation by the Securities Regulation Panel, which is still underway and which may result in an obligation by MGX to increase the offer.
Fair deal?
The CCH-MGX announcement this week also lacks important information necessary to evaluate whether the companies` shareholders are getting a fair deal. The companies say that the date of the deal and the pro forma financial effects will be released later on, which makes it impossible to judge the fairness of the deal or whether the value placed by the market on Infracom (about 30c a share) is accurate.
CCH is not keen to place a value on Infracom yet, and says it is considering various options. If Infracom is sold, which is likely, CCH will probably de-list.
CCH bought 70% of Infracom in February last year, paying R346.5 million for that stake. It increased its holding to 100% later. Analysts differ on how the MGX deal affects the market value of Infracom, with a range between R31 million and R75 million. Either way, it is a far cry from the original purchase price.
Another serious question is the matter of how CCH staff will react to being absorbed into the new MGX group. CCH has always prided itself on its staff relations and the fact that staff have bought into the company`s vision. Although CCH CEO Aletha Ling says employees are excited about the upcoming merger, many outsiders are sceptical, and there is talk about possible desertions by those who are unwilling to face a new corporate culture.
Potential
But what of the long-term effects of the deal on MGX? The company dominates the storage market, but has to move into other areas if it wants further growth.
The two acquisitions (CCH and EC-Hold) make sense if the group is going to combine e-commerce and security with the established data storage business. This could provide the potential for MGX to grow into a large IT player, with solid revenue and earnings.
Although the deal was structured some time ago, around better share prices, the group has probably taken the view that it needs to go ahead with the transaction and take the initial earning per share decline on the chin, aiming for longer-term benefits. The fact that the deal may not be financially lucrative at lower share price levels means that the companies face the challenge of making sure the transaction works, and that they can continue justifying the deal to shareholders.
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