Offer for Datong at 50p

On Friday (10/5/13), having put the company up for sale in February, Datong announced that they had now received an offer for the entire issued shared capital of the company at 50p per share.

At that price I would receive a 31% profit on my share purchases in less than 6 months. So I'm very happy because that's a great return isn't it? No, actually I'm less than happy because whilst my profit is a good return, the offer hugely undervalues this company.

In my previous two articles I did state what I felt were reasonable valuations given the strength of the balance sheet and current trading prospects. The offer values Datong at just £6.92m which is less than £0.5m above Datong's current assets less all it's liabilities. If this was a company in trouble and about to be wound up then £6.92m might be acceptable, but in December they won a lucrative two year contract worth £7.5m and the balance sheet is strong with £2.5m in cash on the balance sheet. The company should see some substantial growth this year and next. In my opinion the valuation at 50p is clearly short-changing shareholders by a considerable margin. See my two previous articles to get, what I think, is a more realistic value.

http://michae1mouse.blogspot.co.uk/2013/02/value-share-heading-for-growth.html

http://michae1mouse.blogspot.co.uk/2013/02/datong-up-for-sale-markets-overheating.html

Heaven only knows how they appear to have come up with this 50p valuation. It looks like it's been plucked out of thin air because it's a nice round number.

As you can gather, I'm not a happy bunny despite making a very decent profit.

Commenting on the Offer, Richard Moon, Chairman of Seven (Technologies) said:
"We are delighted that Datong will be joining Seven". I bet he is at that price.

Currently they have received around 62% in Irrevocable Undertakings to accept the Offer. They will need 90% to complete the deal.

What does really annoy me in these bid situations is that they tend to quote the premium they are paying to the average share price over the past 12 months etc. This is totally irrelevant. The business should be valued based on it's balance sheet, future earnings and prospects not some arbitary value from a depressed share price. In particular shares in micro-cap companies often see large swings in the share price given their relative illiquidity, and the share price often doesn't necessarily reflect it's true worth. That's one reason why micro-caps are attractive to buy for private investors since pricing anomalies are more frequent and these companies rarely appear on the radar of the larger institutions.

Anyway they still need a further 28% of irrevocable undertakings before the offer is completed, and maybe the offer will be improved or another suitor will emerge. Who knows? I will hold until the situation reaches a resolution and then think about where next to invest the profits.