RE: RE: Puncture and Pickup Strategy? I agree that a lot of people liked the trajectory the company was on before the Menagpur deal. Cash was pouring in. The share price was rising and I believed it would double or triple in less than a year. A triple would have only given the company a 5 PE. That all changed.
You are also right that management did not bring retail shareholders with them. Management certainly needs to do a better job in detailing the potential of Mengapur. What bothers me is that neither publicly or privately have they said that the acquisition was accretive to intrinsic value per share. Nor have they said that the PP is accretive to intrinsic value per share. The acquisition certainly could be if the project is worth more than what they paid. It is nearly impossible that selling shares for half of book value can be accretive.
In management's view you don't buy a great asset like Mengapur and let it sit idle for a few years. Thsu they have to develop it. The logic is faulty sinc eit did not compare to alternatives. If you are using existing cash flows and the project has a great net present value then proceed. If you do not have cash you don't say we will just raise it regardless of the price. Just as you don't go borrow at a 20% interest rate , you don't sell equity for a fraction of fair value. Waiting and communicating to the market (shareholders and potential shareholders) that you are discpilined financially and will only do what is in shareholders best interests will lead to a higher share price. And vice versa. Impatience, and communicating to the market that you are willing to massively dilute sharehodlers leads to a lower price.
For those who don't understand why the PP is bad - please read up on finance. Read Berkshire Hathaway's letters where Buffett talks about how much it cost Berkshire over time when they issued shares instead of cash in deals. It is not too late for mangement to reverse course.
Of course Tulum will take the deal. Who wouldn't? It is a bargain basement price. It does not take faith.
Here is a quote from Berkshire Hathaways 2009 Letter:
"I can’t resist telling you a true story from long ago. We owned stock in a large well-run bank that for
decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank
immediately began looking for possible purchases. Its managers – fine people and able bankers – not
unexpectedly began to behave like teenage boys who had just discovered girls.
They soon focused on a much smaller bank, also well-run and having similar financial characteristics
in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside, though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price close to three times book value. Moreover, he wanted stock, not cash.
Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are
in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”
The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After
the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”"
I hope Tulum says the same thing to mangement when the PP is finalized.